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Medibank looks to buy in low growth milieu

Lex Hall with AAP  |  15 Feb 2019Text size  Decrease  Increase  |  
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Medibank Private hopes to snap up smaller rivals if they struggle to cope with premium increase limits planned by Labor if it wins this year's federal election.

The Labor opposition has pledged to limit health insurance premium rises to 2 per cent for its first two years in office, which could open opportunities for sector giant Medibank to expand.

"In the short- to medium-term, we see the potential to make one or two more small acquisitions to build our health services capability," Medibank said on Friday.

"We will consider acquiring a PHI (private health insurance) business in a stressed operating environment."

Medibank health insurance

Medibank will raise premiums by 3.3 per cent this year, down from 3.88 per cent in 2018

The annual cost of healthcare in Australia has risen by 4.5 per cent above inflation over the past decade.

The Reserve Bank this month cut its inflation forecast for the year to June 2020 to 2.0 per cent, which would mean healthcare costs rise 6.5 per cent in FY20 if that trend continues.

Medibank will raise premiums by 3.3 per cent this year, down from 3.88 per cent in 2018 and broadly in line with an industry weighted average 3.25 per cent.

Medibank's health insurance premium revenue rose 2.1 per cent to $3.24 billion in the six months to 31 December, while health revenue rose 9.8 per cent to $320.6 million.

Operating profit rose at both units but overall first-half profit slipped 15.4 per cent to $207.7 million after the private health insurer's income from investments slumped amid challenging market conditions.

Stripping out investment income, Medibank's pre-tax profit was flat at $286.3 million as a 2.7 per cent overall lift in revenue was offset by an increase in expenses.

The company added 6,400 resident policy holders in the six months to 31 December, morethan compensating for the 4,200 lost in the prior corresponding period.

It said it aimed to modestly increase market share over the full year.

Despite the soft result, Morningstar analyst David Ellis said core businesses continue to deliver sound results and that momentum was building for Medibank, whose fair value estimate remains unchanged at $2.95.

Medibank shares were up 3.3 per cent, to $2.85 at 4pm Sydney time on Friday.

Ellis expects a rebound in second-half fiscal 2019 in line strong global and domestic equity markets.

Fiscal 2020 on the other hand will be challenging given the potential for lower premiums.

"Despite political and regulatory challenges, we expect Medibank to eke out small increases in policyholder volumes at margins only modestly lower than fiscal 2019 levels,” Ellis says.

"To achieve this outcome management must maintain ongoing tight control of operating expenses."

Ellis forecasts a net increase in policyholder numbers of 0.5 per cent, or 10,000 in fiscal 2019 and 1.5 per cent, or 27,500 in fiscal 2020. And he expects a flat overall PHI market volumes to persist during the next year at least.

Medibank, which raised its interim dividend 0.2 cents to a fully franked 5.7 cents, said it expects to provide an update on additional productivity initiatives when it announces its full-year results in August.

Medibank's 1H result:

  • Net profit down 15.4pct to $207.7m
  • Revenue up 2.7pct to $3.561b
  • Interim dividend up 0.2 cents to 5.7 cents, fully franked

 

 

. Lex Hall is content editor with Morningstar Australia

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