Medibank Private Limited (MPL)
BUY

Hacked!

 26 Oct 2022
Sector: Financials

EARNINGS MOMENTUM KILLED

Need To Know

  • Unresolved cyber incident, policy holder guidance withdrawn for FY23
  • No cyber insurance.
  • Estimated $25-35m pre-tax impact non-recurring
  • Share price reaction -15%, a large move by global cyber incident reactions

After three trading halts and five ASX announcements since the cyber incident was first reported on 13 October 2022, MPL has provided its most fulsome disclosure on the incident.

We see three key impacts;

1)     Incident is ongoing and unsolved, with an estimated $25-35m pre-tax impact for FY23E at this stage

2)    Costs of the event should largely be contained in FY23E.  Several questions remain around the potential for higher spending, including IT spending going forward.

3)    What is the impact to policy policyholder growth following the cyber incident?

Investment Implications

-15% share price fall today looks relatively large vs global precedents of companies announcing cyber security issues (typically in the 1-5% range).

The $25-35m earnings impact represents 3-5% downgrade to market estimates of Profit Before Tax (PBT) for FY23E.  Suggests the share price has potentially overreacted to the downside.

Additionally, MPL released 1Q23 numbers across policyholder growth (above expectations) and claims expenses (below expectations) whilst company management expenses were in line, suggesting MPL was continuing to perform strongly during 1Q23. 

The large move in the share price reflects the loss of positive earnings momentum before the cyber incident (FY23E EPS estimates +12% vs March 2022) and an expanded PER relative to the market that MPL trades on (1.5x vs 1.0x 2 years ago). 

Growth-focused and quant-style investors are likely exiting MPL positions today, partly explaining the oversized move in the share price.

MPL must fully cauterise the damage from this data breach to restore investor confidence. The share price reaction does provide those with a longer-term view an opportunity to capitalise on the situation.

Figure 1: MPL PER around the long-term average going prior to cyber event

Figure 2: MPL PER REL vs market at highest level for 2-years

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Stock overview

Share Price

Company overview

Medibank Private is one of Australia’s largest private health insurers covering 3.7 million people in 2021.

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