Medibank delivered 1H18 NPAT of $245 million, which is an increase of 6% versus the same time last year.
Operating conditions are expected to remain largely unchanged and we expect revenue and underlying profit to remain flat in FY19.
With the stock trading 20x earnings and 4.1% yield, investors should add an at-the-money-call option to strip out the maximum cash flow from dividends, call option premium and franking credits.
Medibank
Shares of Medibank Private have reached a new all-time high of $3.38 as the Federal Government approved a 3.95% increase in fees for calendar year 2018.
The news was a shot-in-arm for the private insurance provider whose shares have gained over 6.5% in the last 7 trading sessions.
Since our last ALGO buy signal in May at $2.73, the stock has picked up almost 24%. MPL shares are currently trading at 21X earnings on a 3.6% yield
Internal momentum indicators have now reached overbought territory and we suggest exiting long positions at, or near, the $3.30 level.
We will look for a pullback in MPL to reenter long positions and update accordingly.
MediBank Private
Medibank remains in our ASX50 model portfolio from lower levels and we continue to view the stock as a worthwhile buy-write strategy at the current “higher low” price formation.
MPL pays $0.053 dividend on the the 7th of March and when complimented with a $3.30 June call option, (credit $0.11), the strategy delivers 10%+ in annualised cash flow.
MPL reports 1H18 earnings on the 16th of February and the market is looking for 3 – 5% EPS growth and NPAT of $230 million.
If we assume FY18 NPAT of $440m, (up 4% on FY17), and $0.12 per share in dividends, Medibank Private is now 20x FY18 earnings on a forward dividend yield of 4.3%.
Medibank continues to drive industry wide reforms, although growth appears limited due to ongoing affordability concerns.
We recommend selling at the money covered call options into June to enhance the yield, whilst keeping exposure to the March dividend.
Medibank’s FY17 group NPAT of A$450 million was slightly ahead of consensus, largely on higher investment income with a 2H16 dividend of $0.0675 cents per share.
Based on FY18 EPS growth of 1 – 3%, we have MPL on a forward yield of 4.4%.
MPL, SHL & CSL are worth adding to your watch-list. We see the current price levels in these names, at or near new buying support.
Over the last two weeks, yield sensitive names like SYD, TCL and GPT have all dropped over 10% from recent highs.
One of the main drivers has been the change in interest rate expectations from G-7 central bankers and the subsequent rise in short-term paper.
Moving forward, we see more likelihood of G-7 rates reverting lower within the year’s range and providing upside potential in the stocks above.
Other stocks we like on the basis of lower local rates are: AMC, WOW and MPL.
We see reasonable upside potential in the names and will employ the derivative overlay strategy (selling covered calls) to enhance the portfolios returns.
Transurban
Sydney Airport
General Property Trust
Woolworths, Woodside, Medibank & Origin look like they’re setting-up as strong buy signals.
Other names which we view favourably from recent ALGO alerts include, SYD, TCL & GPT.
Recent price action in the local ASX market suggests we’ve entered a period of heightened volatility and potential for downside risk. Since posting the high for-the-year at 5945.00, the index for Australian shares has dropped almost 4%.
Looking across the spectrum of ASX top 100 stocks, we have found several names which can offer defensive value in a broadly sideways to lower share market.
These include: IPL, MPL, WOW, CTX, QBE, SHL, SYD, TCL, AMC, and IAG.
We consider these stocks to have the potential for moderate capital growth and, combined with a buy/write strategy, will offer 10 to 12% cash flow on an annualized basis.
ASX: XJO Index
The ALGO engine triggered a buy signal on yesterday’s close for MPL at $2.72.
Internal momentum indicators are showing an oversold condition, which doesn’t rule out a test of the January lows near $2.60.
As a defensive name in an increasingly uncertain market, we suggest buying shares of MPL and using a derivative overlay strategy to enhance the returns.
We still see limited revenue growth and material resistance in the $3.00 area. However, with the 4% dividend yield and income from the option premium, we see the stock as positive income contributor to client portfolios.
Medibank
Level 29 Chifley Tower
2 Chifley Square
Sydney, NSW 2000
1300 614 002
Investor Signals Pty Ltd
ABN 44 143 555 453
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