Down 10% since mid-March, are Medibank shares a buy or a sell?

The Medibank Private Ltd (ASX: MPL) share price has dropped around 10% in the last couple of months, as we can see on the chart below. In this article, I’m going to look at whether the ASX healthcare share is a buy or if it’s one to avoid after announcing a business update.

Medibank is the largest private health insurer in Australia, with its Medibank and ahm brands.

Let’s first consider why some investors may be negative on the company.

Why be negative on Medibank shares?

Writing on The Bull, Dylan Evans from Catapult Wealth said:

Group revenue from external customers of $4.024 billion in the first half of fiscal year 2024 was up 3.3 per cent on the prior corresponding period. Group operating profit of $319.4 million was up 4.2 per cent. Across the industry, our concern is rising premiums may price existing customers out of private health insurance and deter others from joining funds.

However, there are some reasons to be positive about the business.

Positive update from the ASX healthcare share

At the Macquarie Australia Conference, Medibank shared some interesting insights.

Firstly, it did note that the average health insurance premium increase from 1 April 2024 will be 3.31% but that “remains below inflation and wage growth in Australia.” That suggests revenue growth for the business over the next 12 months.

APRA statistics released in late February showed “continued industry resilience” with an increase of approximately 277,000 Australians having resident private health insurance hospital cover in the 12 months to 31 December 2023. This included an increase of around 96,000 people under the age of 30, which is “critical to the long-term sustainability of Australia’s health system, reflecting the benefit of recent reform and the growing importance of health among consumers.”

Resident industry policyholder growth was 2.06% over the 12 months to 31 December 2023 compared to 1.9% growth for the 12 months to 30 September 2023, which it called resilient in the face of ongoing costs of living pressures.

However, Medibank did note that the industry continues to be competitive, which is expected to persist in the fourth quarter, which is “historically a strong quarter for growth”.

The ASX healthcare share then said:

Despite this competition, Medibank remains disciplined in its approach by targeting profitable growth in priority segments, including corporate, families and new to industry customers, where we are seeing continued positive momentum. Based on our performance in the March 2024 quarter, we remain on track in our aim to deliver our resident policyholder growth outlook of 1.2% – 1.5% for FY24.

For me, that’s a key part of the equation – policyholder growth. If Medibank’s policy numbers are growing, then it can benefit from increased scale and hopefully deliver a bigger profit and dividend.

Another element of short-term profitability is claims (costs). The company said the risk equalisation outcome in the three months to March 2024 continued to reflect the “benefit of favourable age claiming patterns for Medibank”. Claims growth per policy unit for FY24 among resident policyholders is expected to be at the lower end of its guidance range of between 2.2% and 2.4% for FY24.

Trends impacting claims in the first half of FY24 have “continued into the second half, including particular softness in non-surgical and extras claims, and this is anticipated to result in claims continuing to be below” expectations in the second half of FY24.

Foolish takeaway

The Medibank share price looks relatively attractive to me – revenue is rising, claims are subdued and the company continues to pay a good dividend. The Commsec estimate puts the FY25 grossed-up dividend yield at 6.8%.

The post Down 10% since mid-March, are Medibank shares a buy or a sell? appeared first on The Motley Fool Australia.

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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.