The Medibank Private Ltd (ASX: MPL) share price has risen 10% to $2.94 in the days since its annual results were released. I'm still not a buyer of the company though, for several reasons:
- Profit growth was almost entirely due to investment performance
Net profit was up $32 million, largely due to (pre-tax) an $81 million improvement in investment performance and a $10 million uplift in Medibank Health services earnings.
- Core health insurance business is still losing ground
Health insurance premium revenue grew just 1.2% and insurance operating profits fell 2.6% during the year due to declining market share and possibly also investment in the customer (i.e., giving the customer more benefits, thus increasing costs and reducing profits). Market share fell a further 0.6% to 26.93%, according to management's estimates. Notably at least one listed company has been a possible benefactor of Medibank's malaise, with NIB Holdings Limited (ASX: NHF) growing its market share meaningfully during the year.
- Margins are worsening due to investment in customer
On top of this, the company's expenses lifted sharply and the management expense ratio (management expenses as a % of premium revenue) lifted from 8.4% to 9.1%. After two years of cutting management expenses, the company has reverted to the ~9% ratio it had upon listing. I think this could be considered a firm figure moving forwards.
To be sure, none of these issues is terminal. With the increase in dividend payments, Medibank is now paying a 4.4% fully franked dividend, which many income investors will find attractive. Additionally, with $2 billion in investments, the company stands to benefit significantly from rising interest rates. Just for illustration, a 1% increase in interest rates could translate into a $20 million – or 3% – improvement in profit before tax. There are also the long-term tailwinds of growing healthcare demand and an ageing population.
Even so, turning around Medibank's declining insurance business looks like hard work, and to my mind this makes it important not to overpay for Medibank shares.
