Medibank Private – the IPO

Medibank Private is about to become the largest public asset sale since Telstra – current estimates put the market capitalisation of the country’s largest health issuer above QR National’s 2010 listing.

Source: Medibank Corporate Affairs

The IPO will see retail and institutional investors offered 2.754 billion shares at an indicative price range of $1.55 to $2.00. The government is hoping to raise between A$4.269 and A$5.508 billion, resulting in a complete unwinding of its ownership. 750,000 investors have pre-registered for the prospectus and the final broker firm received was $11.987 billion in bidding bids – that’s close to 2.1 times more than the total shares on offer (at $2).

In return, Medibank has only allocated $1.5 billion of the $12 billion bid – which is some haircut. Retail and institutional investors now have to battle it out for the remaining $3.5 billion of shares left. They may have to fight hard to get a piece of the action, considering the news out today.

There are several enticements for retail investors, which certainly explain the demand.

Firstly, the IPO price is capped at $2 for retail investors, even if the book build sees the price rise above this figure. Medibank (MPL) makes up 29.1% of the total Australian health insurance market (according to the prospectus) and holds the dominant position among the 33 different health insurance providers in the country.

Its market-leading position has helped group revenue. This is dominated by health insurance premiums, with over 90% of FY15 numbers generated by its core business. Considering health insurance is the one form of insurance that has been unaffected by slippage over the past three years, the revenue growth estimates of 4.2% look conservative, as do estimated profit margins. Operating profit growth is estimated to grow by 10.5%, which should support a very respectable estimated dividend yield of 4.2% to 5.4%.

The first fully-franked dividend for the seven months to June 30 2015 is forecast at 4.9 cents a share, representing an estimated payout ratio of 70% to 80%. This is highly enticing, but investors are going to have to wait a while for their first payment, which is expected in September 2015.

Interestingly, the earnings estimates see MPL’s price to earnings (P/E) ratios for the indicative price range coming in at 16.5 to 21.3 times earnings.

This puts MPL’s pricing at an interesting level – Healthscope recently rejoined the market priced at 24.9 times forward earnings. However, HSO is a health provider rather than a health insurer. The premium to market when compared to the healthcare space looks justified – it trades at a forward P/E of 18 times earnings with a current P/E of 28.6 times.

The insurance sector trades at an estimated forward P/E ratio of 13.4 times for CY14, falling to 12.0 times earnings in CY15. Compared to listed rival NIB, it looks roughly on par with NIB, trading at a PE ratio of 19.1 times. Bear in mind, though, that NIB only has a market cap a quarter the size of MPL.

The major comparable names, such as AMP, Suncorp and IAG trade on forward P/Es of 15.1, 13.2 and 13.8 respectively. Could it therefore be considered expensive at $1.55 – 16.5 times earnings – let alone 21.3 times at $2?

The thing that’s likely to drive the P/E ratio down over the coming years is efficiency – costs have long been a major criticism of MPL as the impact of government ownership has dragged.

Cost efficiency and claim management are the two expenditure points that MPL believes it can quickly shore up, increasing the likelihood of net profit estimates and payout ratios. If management can indeed implement a path to capital efficiency, the current price estimates will be more than fair.

This is why we’re pleased to be offering a contract for difference (CFD) grey market in Medibank Private. The ‘grey market’ is priced by IG, based on where its clients believe the day one closing price of the stock will be (the listing is expected on 25 November).

Traders have bid the IG grey market to $2.20, which is now 10% above the indicative range and 5% above most analysts’ 12-month estimates.

However, as this is a normal two-way market, traders have already resisted a move higher by starting to lock in profit, and some are even going short at or above the $2.20 price point, believing the moves are based more on rumour than fact.

Remember, the CFD ‘grey market’ is priced by IG, based on where its clients believe the day one closing price of the stock will be. The market enables traders to trade CFDs on Medibank before it lists, giving them the ability to gauge whether the float is over- or under-priced. It should therefore be a good indicator of Medibank’s final closing price.

For traders who have an interest in Medibank and have a view on the closing price on the first day of trade, the CFD grey market will be available on IG’s trading platform during the Australian trading hours of 10:00 to 15:59 (AEDT). Clients trade off a bid/offer spread, based on what they think the closing market price at the end of the first trading day will be, meaning all open positions will settle on Medibank’s closing price on its first day of trade.

We foresee market noise like the release of the broker firm numbers continuing to drive price spikes in Medibank in the lead up to the listing.

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