Expanding Digital Health In Australia Will Build Future Success

Key Takeaways

• Diversification into preventative and at-home healthcare, digital innovation, and younger customer segments is strengthening Medibank's market position and supporting sustained top-line growth.
  
• Robust M&A strategy and industry consolidation trends are increasing revenue diversity, improving risk management, and providing significant long-term earnings potential.
  
• Cost pressures, intensifying competition, regulatory risks, and digital disruption threaten pricing power, earnings stability, and long-term revenue growth for Medibank's core business.

Catalysts

Provides private health insurance and health services in Australia.

• The increasing demand from Australia's ageing population and growing skilled migrant intake is expected to drive long-term growth in Medibank's membership base across both resident and non-resident segments, supporting top-line revenue expansion.
  
• The expansion and scaling of primary care clinics, virtual health, and home care offerings position Medibank to benefit from the shift in consumer preferences toward preventative care and at-home healthcare, helping to differentiate its offering, limit claims inflation, and improve net margins.
  
• Ongoing investment in digital transformation and AI-driven platforms is reducing administrative costs, accelerating customer service improvements, and enhancing claims integrity, providing a tailwind for net margin and cost efficiency in future periods.
  
• Accelerating momentum in corporate and younger policyholder segments-as well as policy conversion from non-resident (student/worker) to resident cover-improves the risk pool quality, retention, and cross-sell opportunities, supporting revenue growth and moderating claims costs.
  
• Industry trends toward consolidation and Medibank's disciplined growth approach, combined with a robust M&A pipeline and significant capital headroom, provide optionality for further revenue diversification and long-term earnings growth.

Medibank Private Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Medibank Private's revenue will grow by 5.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 5.9% today to 7.2% in 3 years time.
• Analysts expect earnings to reach A$710.7 million (and earnings per share of A$0.26) by about September 2028, up from A$500.8 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 24.0x on those 2028 earnings, down from 27.3x today. This future PE is greater than the current PE for the AU Insurance industry at 19.9x.
• Analysts expect the number of shares outstanding to grow by 0.35% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.48%, as per the Simply Wall St company report.

Medibank Private Future Earnings Per Share Growth

Risks

• Ongoing cost-of-living pressures and high premium increases across the industry are increasing the incidence of policy downgrading and customer switching, which threatens revenue growth and places downward pressure on average premium income and long-term earnings.
  
• Intensifying competition, particularly due to unsustainable acquisition tactics from rivals and reliance on aggregator channels, may further compress Medibank's pricing power and raise acquisition costs, impacting net margins and future profitability.
  
• Significant inflationary pressures in hospital and healthcare provider costs-including anticipated wage increases, indexation, and regulatory reforms-could outstrip premium growth if not successfully offset, leading to increased claims inflation and potential margin compression.
  
• Structural risks remain from heavy exposure to the Australian market and regulatory intervention, as future government actions on premium controls, subsidy changes, or pressure to support public hospitals could materially limit Medibank's ability to increase prices, reducing long-term revenue and EBIT stability.
  
• Technology-driven disruption, including alternative digital health models and emerging insurtech competitors, presents a long-term threat to Medibank's traditional insurance and care models, risking market share erosion and a shrinking addressable base-potentially lowering future revenue growth and earnings.

Valuation

• The analysts have a consensus price target of A$5.082 for Medibank Private based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of A$5.7, and the most bearish reporting a price target of just A$4.3.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be A$9.9 billion, earnings will come to A$710.7 million, and it would be trading on a PE ratio of 24.0x, assuming you use a discount rate of 6.5%.
  
• Given the current share price of A$4.96, the analyst price target of A$5.08 is 2.4% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.