Medibank Private Ltd (ASX: MPL) appears to have the market confused. After surging from the institutional IPO price of $2.20 in November 2014 to nearly $2.60 February, Medibank's share price has steadily declined to within touching distance of $2.00 per share, the retail IPO price.
The reason for the fall appears to be a consensus among sharemarket analysts that Medibank will struggle to hit its prospectus forecast for both growth and gross margins, potentially a major issue. The interesting thing is that the same analysts believe the shares are worth $2.40 and still worth buying at current prices.
Should you buy Medibank Private Ltd today?
The million dollar question, for those with that kind of money, is what the long-term outlook is like. Analysts, in order to justify the lofty price target, appear to be taking a very long-term view of the company's ability to negotiate better deals with hospitals and therefore improve gross margins.
The theory is that Medibank is in a position of power due to its 30% market share of the local private healthcare market, and hospital operators like Ramsay Health Care Limited (ASX: RHC) and Healthscope Ltd (ASX: HSO) will bend over backwards to make sure Medibank doesn't walk away.
There's merit to this theory, however there are also risks. Medibank may well be in a position of power but so are Healthscope and Ramsay for different reasons. Sure, Medibank's customers will be disappointed if they can't get maximum benefits at hospitals operated by Ramsay and Healthscope, but equally those customers could be significantly disadvantaged by Medicare's tough stance, particularly in regional areas where hospital choices are limited. This could see Medibank's customer numbers fall in localised areas.
Maybe you should sell Medibank?
The analysts at UBS earlier in the year acknowledged the downside risk inherent in Medibank's model and rated the company a SELL. The group did note that claims growth moderated and margins stabilised in the most recent quarterly statistics, however they see Medibank's customer lapse rate as a serious concern.
The team at Morningstar also noted following the first half result that "…softer than expected premium revenue growth is concerning and is likely to continue as policyholders downgrade product features and or increase churn rates."
Full-year reporting
Analysts will watch a few major signposts in the full-year results, due in August. They are gross margins, revenue growth, and lapse rates. Lapse rates will be of particular concern as Medibank was granted a 6.59% premium increase at the last review, at a time when wage growth and inflation is struggling to rise above 2.4%. This is making health insurance more difficult to maintain and will FORCE consumers to move to lower-cost brands. This is evidenced by Medibank's core brand lagging behind the industry growth rate by around 3%, while the low-cost AHM brand saw policyholder numbers increase by 20% over the 12 months to December 2014.
