Medibank rerated following management’s upgraded guidance

After falling by as much as -6% last week following a reported drop in first-half net earnings, shares in Medibank Private Ltd (ASX:MPL) traded flat today despite upgrades by Morgans and Citi on the back of more bullish outlooks.

Morgans upgraded to Add from Hold, while Citi upgraded to Buy from Neutral.          

While other bank analysts were more cautious, maintaining existing ratings with slightly lower target prices, both Morgans and Citi expect margin gains for the FY22 due to cost-cutting, stable margins and the prospect of further deals to buy hospital stakes. 

The first half result included news that management expense ratio (MER) - the broad indicator of operating costs in the sector -  fell slightly in first half FY22, to 7.2% in the health insurance division.

However, Morgans believes there are “over 10% total shareholder returns on offer over the next 12 months”.

Highlights of the first half result

• Upgrade of Medibank’s deferred claims liability by $104.9m, to nearly $329m.

• NPAT of $220.2m down -2.7% from the 1H21, due to lower investment income compared with the bumper investments made in 1H21.

• Policyholders grew 1.5%.

• 70% of new customers below age 40.

• Group operating profit up 12.3%, to $286.5m.

Management upgraded FY22 guidance to 3.1%-3.3% from 3% previously and expects continued margin growth and a reduction in claims inflation to 2.3% from 2.4%.

Growth by acquisition

Citi cites “potential bolt-on” acquisitions as a reason for its own upgrade.

Medibank has already purchased a stake in one Sydney private hospital and established a joint venture to build a second hospital in Kew, Melbourne, by 2023.

CEO David Koczkar noted that the insurer is close to a deal to acquire a stake in a third short-stay hospital.

"Our aspiration is to invest in a network of short-stay hospitals through partnerships and in collaboration with doctors in major markets across the country.”

The strategy to buy hospital stakes could allow the insurer to clamp down on out-of-pocket costs paid by customers - one of the main reasons for clients to question the value of their health insurance.

Medibank Private share price: A 12-month view