Medibank ‘insuring’ growth
Medibank Private (ASX:MPL) is a long term holding in The Montgomery Fund and The Montgomery [Private] Fund with our investment case being partly based on superior investment in productivity, thanks to scale, that delivers both a functionality and cost advantage over its competitors.
By way of example, the A$30 million of additional productivity benefits in FY21 and FY22 announced in August, coming on top of the A$60 million benefits realised between FY18 and FY20, provides Medibank with an improving competitive position. Medibank’s scale advantage will become meaningful in coming years as ARPA ratchets up the regulatory and compliance pressure on smaller operators. The company is well placed in terms of operating costs, capability, scalability and capital in this environment.
More immediately, Medibank has just announced its average premium increase will be a net 3.27 per cent on 1 April 2020 and 3.5 per cent excluding discounts. Market forecasts were implying an increase of less than 3 per cent so the extra 27 basis points of premium adds around A$18 million to our EBIT forecast.
In terms of key competitors, Bupa’s and HCF’s increase is the same of MPL’s, but NIB, HBF and Australian Unity are below these levels.
While naysayers might point out claims cost inflation being higher, and therefore higher premium rate increase failing to alleviate margin pressure, the acceleration in claims costs is already known following Medibank’s trading update a month ago and forecasts have already been adjusted for this. The market downgraded for higher claims cost inflation but assumed this would have no impact on the size of premium rate increases.
The new information is that premium rate growth will be stronger than previously thought.
The Montgomery Fund and Montgomery [Private] Fund own shares in Medibank Private. This article was prepared 10 December with the information we have today, and our view may change. It does not constitute formal advice or professional investment advice. If you wish to trade Medibank Private you should seek financial advice.
Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
