Morningstar | Medibank Private Loses Department of Defence Contract. FVE Cut 5% to AUD 2.95
Narrow-moat private health insurer, Medibank Private surprised with disappointing news its lucrative contract providing health services to the Australian Department of Defence will not be renewed when the current contract expires June 30, 2019. Medibank provided the service to the Government via its Medibank Health division. The Defence Department contract contributed approximately AUD 30 million in pretax operating profit in fiscal 2018, representing 5% of group operating profit. We have stripped out the earnings from our forecasts from fiscal 2020 and later years, as well as absorbing AUD 5 million in contract exit costs in fiscal 2019. The loss of future earnings results in a 5% reduction in our fair value estimate to AUD 2.95 per share from AUD 3.10 previously. Our forecast dividends ease marginally to AUD 13.00 cents per share and AUD 12.80 cents per share for fiscal 2019 and 2020, respectively. Medibank does not expect material “standard†costs after the contract ceases.Our forecast NPAT for fiscal 2019 declines 1% to AUD 455 million, with a 5% reduction in fiscal 2020 NPAT to AUD 451 million. The market pared back Medibank’s share price by 8% on the day of the announcement and at current prices the stock is undervalued trading 11% below our updated fair value estimate. Going forward, the contract loss reduces our forecast operating profit for the Medibank Health Division to AUD 34 million in fiscal 2020 from AUD 64 million previously. Based on our forecasts, Medibank Health will now contribute 6% of group operating profit down from 11% in our previous forecast. Despite the setback, we are positive on the long-term outlook for Medibank, but the potential change in government in 2019 could crimp short-term earnings growth with current Labor party policy calling for a 2% cap on premium rate increases for two years. The average industry premium rate increase was 3.95% for 2018 and we expect a lower increase effective April 1, 2019--probably around 3% levels.
There was no update on the significantly larger and more important Medibank Insurance business, but at the recent AGM, CEO Craig Drummond confirmed no change to the outlook for fiscal 2019. Medibank Insurance delivered a AUD 536 million pre tax operating profit in fiscal 2018 and we forecast a similar outcome for fiscal 2019.
Medibank confirmed its market share has stabilised, 18 months ahead of its initial target date. APRA data indicates the Medibank group grew market share by 5 basis points in the six months ended June 30, 2018. Medibank is targeting modest market share growth in fiscal 2019 with approximately 8,000 new net policyholders added in the first four months of fiscal 2019. We forecast net increase in policyholder numbers of 0.5%, or 10,000 in fiscal 2019 and 1.5%, or 27,500 in fiscal 2020.
We expect good progress to continue in improving the underlying business efficiency, with management confirming its target to reduce management expenses by a cumulative AUD 60 million in the three years to end of fiscal 2020. Approximately AUD 20 million in productivity savings were achieved in fiscal 2018 with another AUD 40 million in total targeted for fiscal 2019-20. Management expenses for fiscal 2019 are guided to be modestly above fiscal 2018 levels.
Despite the loss of the Defence Department contract, Medibank Health benefits from the acquisition of HealthStrong 16 months ago and Home Support in August 2018. The previous target of doubling Medibank Health’s share of group operating profit to around 10% is now unlikely, with our fiscal 2020 forecast contribution of around 6% of group operating profit. Medibank expects to make one to two small acquisitions in fiscal 2019 to continue building the firm’s health services capability.
On a positive note, hospital utilisation growth remains subdued with ancillary utilisation growth expected to be slightly lower than fiscal 2018. This bodes well for claims expenses in fiscal 2019. In addition, Medibank has released a claims provision of approximately AUD 10 million as at Oct. 31, 2018. The dividend payout ratio target of 70%-80% is unchanged. The insurer’s capital position remains strong with our forecast fiscal 2019 dividend based on a 79% payout, towards the top end of the target range. Longer term, we expect the payout to average around 78% per year.
Medibank Private is a private health insurer. Co.'s main business is Health Insurance, whereby it underwrites and distributes private health insurance policies under two brands, Medibank and ahm. Co. has two segments, Health Insurance, which provides private health insurance products including hospital cover and extras cover, as stand-alone products or packaged products that combine the two and also provides health insurance products to overseas visitors and students; and Complementary Services, which include activities such as contracting with government and corporate customers to provide health management services, as well as providing telehealth services in Australia and New Zealand.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
We have operations in 27 countries.
Unfortunately, this report is not available for the investor type or country you selected.
Browse all ResearchPool reportsReport is subscription only.
Thank you, your report is ready.
Thank you, your report is ready.