The retail offer portion of the $4 billion float of Medibank Private opened on Tuesday October 28. The prospectus has been out and about for a while now, allowing analysts and expert commentators to demonstrate their knowledge by picking it apart for potential issues. I found five interesting facts earlier this week that I thought you should know. Here are another five that potential investors should weigh up:
- I mentioned last time that Medibank was being promoted as an insurance company but actually generated 22% of profit from its $2.2 billion investment portfolio. Interestingly, the group paid a $450 million dividend to the government last year, reducing the size of the investment portfolio. As a result, investment earnings are predicted to fall from $113.9 million to $89.7 million in the current financial year.
- Medibank's investment portfolio is currently weighted 18:82 between growth and defensive assets. The group is planning on increasing the growth asset allocation to 25% in order to improve returns in the current low interest rate environment. QBE Insurance Group Ltd (ASX: QBE) has flagged a similar strategy for its $30 billion portfolio. This will introduce more volatility to earnings.
- Medibank is forecasting 6% earnings growth in the 2014-15 financial year. The prospectus predicts that EPS will be 9.4 cents per share in 2014-15, up from 8.9 cents in 2013-14.
- In a normal year, Medibank expects to pay out 75% of earnings in dividends. If the share price ends up being $2 following the completion of the bookbuild, this equates to around 7 cents per share in the 2014-15 financial year, a yield of 3.5%- or 5% grossed up for franking credits. BUT! This will not be the case in the 2014-15 financial year! Medibank will issue a dividend of 4.9 cents per share in September 2015 for the seven months between December and June, which equates to 8.4 cents (or a 4.2% yield) on an annualised basis.
- The private health industry is heavily regulated by the government. Fee increases must be approved by the government, which limits the margin expansion possible over the medium term. Some commentators have also noted that annual increases of between 5% and 7% are not sustainable in this low wage growth environment.
My major concern is the lack of upside. I like QBE because the group has a huge amount of fat to cut from the business and investment returns can really only go up; I feel that this isn't the case for Medibank, however time will tell.
