Healthscope Gaining As Medibank Private Lifts Performance

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By Chris Shaw

Whether or not Medibank Private joins Telstra (TLS) as a privatisation play in the future, and it is looking increasingly likely it will in 2008 as the House of Representatives has already passed the privatisation legislation, the group’s performance is having an impact on hospital operators.

Australia’s largest private health insurance provider has enjoyed a strong turnaround in operating performance in recent years, as Southern Cross Equities notes from a loss of $175m in FY02 the group has improved to post a profit of $200m in FY06.

This turnaround is providing benefits to hospital operators, as with stronger profits the group has greater leeway to provide funding increases to hospital operators. In addition, the broker notes Medibank has been offering the most attractive deals to the hospital players with the widest geographical spread of operations, meaning Healthscope (HSP) and Ramsay Health Care (RHC) have been offered the best terms.

This is somewhat of a two-way street, as the broker notes the larger hospital operators can also provide the health insurers with more cost efficient delivery, so both sides are gaining from the deals.

Longer-term the broker sees this trend continuing as it expects there will be further consolidation in the health insurance sector. Currently there are about 40 providers nationwide, but it expects a period of industry consolidation to result in about six major players emerging as dominant.

It suggests this is pointing to further gains for Healthscope longer-term, so the broker has maintained its Buy rating and target price of $5.95. The broker’s positive view is one of many opinions on the stock, as the FN Arena database shows the company as being rated Buy twice, Accumulate once, Hold twice and Reduce and Sell once each. The average price target is $4.99, while the stock today is trading down 1c at $5.01.

Ramsay Health Care shares are also weaker, down 16c in early trading to $10.66. The FN Arena database shows a slightly more positive stance, as the stock is rated Buy three times and Accumulate once compared to three Hold ratings and one Sell. The average share price target is $10.70.

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