Shares in private health insurer Medibank Private Ltd (ASX: MPL) are edging lower today and now trade at $3.15 apiece.
Medibank shares have taken a beating since we started the new year. After peaking at highs of $3.60 per share on 7 January, investors have melted more than 12% off the value of Medibank's share price at the open of trade on Thursday.
So, when will the selling pressure begin to liftoff, and what does all of this mean for Medibank shareholders in the long run?
The team at JP Morgan have some interesting thoughts on the topic, seeing as the investment bank covers Medibank in its insurance and diversified financials universe.
In a recent note, analysts at JP Morgan Securities Australia, led by Siddharth Parameswaran, downgraded the broker's recommendation, urging its clients to sell Medibank shares. Here are the details.
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Brokers now underweight on Medibank
The team at JP Morgan turned bearish on the health insurance giant following its detailed assessment of key issues going into the first half of FY22.
In the short run, the broker says that Medibank will benefit from a winding back of COVID-19 claims, but profits "may not materially benefit" because of obligations to policyholders.
Not only that, but the firm is far less constructive on the entire insurance sector, given the foreseeable challenges to profitability moving forward.
"In the medium term, material increases in capital requirements, only a partial return to prior profits in IIHI and travel, even lower rate increases that could be below underlying inflation trends, uncertainties arising from the federal election, and relative valuation differences with other stocks in our sector make us cautious on the sector outlook" the broker noted.
Medibank should see modest earnings growth in FY22 according to the firm – but with even more benefits next year as premium activity normalises.
Long-term, the broker notes there is a risk that "claims utilization returns to long-run trends, making holding margins difficult following ever-lower premium increases".
It forecasts premium revenue of $6,983 million for FY22 and $7,256.2 million in FY23, which carries down to statutory NPAT of $408 million and $422.5 million respectively in the broker's model.
This would lead to operating margins of 7.8% in FY22 and an adjusted return on equity (ROE) of 21.2% this year should JP Morgan's thesis come to light.
As a result of its most recent assessment, the broker downgraded its valuation on the company to $3 per share, from $3.30 per share previously.
It notes the change in price target reflects "earnings changes post our MTM and valuation roll forward", including franking credits valued at 70% of face value.
Medibank share price snapshot
In the last 12 months, the Medibank share price has held gains and is now up almost 5% in that time.
Since 2022 however, things have turned sour and shares are now down 8% after faltering in early January. As such, Medibank leads the benchmark indices in losses so far this year.
