Is the Medibank Private IPO really worth the hype?

Medibank Private is garnering enormous levels of interest, but is the stock a little overhyped?

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The federal government has set an indicative price range of between $1.55 and $2.00 for the float of its Medibank Private shares in what could well be the biggest initial public offer (IPO) of the decade.

With more than two weeks remaining for investors to submit their bids, more than $12 billion worth of bids have already been received from stockbrokers highlighting the enormous level of interest the stock has received. But the question needs to be asked:

Is the stock really worth $2 a share?

As it stands, there's a 29% difference between the indicative high and the indicative low.

At $1.55, investors would be getting a bargain. The shares would be trading on a forecast P/E ratio of 16.5 times earnings and those who submitted their bids would be getting a quality business in a fast growing industry with strong competitive advantages.

At $2.00 however, investors are paying up for a company which may not live up to its potential. It would be trading on a forward P/E ratio of 21.3 times earnings and command a market capitalisation of roughly $5.5 billion, making it one of Australia's top 70 companies by size. There would also be an enormous expectation surrounding the company's ability to reduce costs, improve productivity and start catching up with some of its rivals, including BUPA, NIB Holdings Limited (ASX: NHF) and HCF in terms of growth.

When investors subscribe for their parcel of shares, they have no idea how many shares they will get. But given the high level of interest, it's only fair to assume the shares will open at the higher end of the range – or maybe even above $2.00. Of course, the price is capped there for retail investors, but it's still a high price to pay.

A seller's market

It should also be noted that this is a seller's market. Have you ever noticed how IPOs only occur when the market and investor confidence are both riding high? Just look at the flurry of IPOs which have occurred over the last year including the likes of Veda Group Ltd (ASX: VED), OzForex Group Ltd (ASX: OFX) and Healthscope Limited (ASX: HSO). The government will no doubt get a good price for the sale of Medibank Private, but the buyers might not be so lucky.

I'd be willing to bet that the shares will start off strong, and then experience a setback at some point, presenting investors with a more compelling entry point.

Of course, I might be wrong. The shares could open up significantly higher than $2.00 on the IPO day and never fall below that price ever again. But at the same time, I'm paying close attention to the risks facing the business and I don't believe there is a great enough margin of safety at the higher end of the indicative range.

Motley Fool contributor Ryan Newman owns shares in Veda Group Ltd. The Motley Fool owns shares in OzForex Group Ltd.

More on ⏸️ Investing

Close up of baby looking puzzled
Retail Shares

What has happened to the Baby Bunting (ASX:BBN) share price this year?

It's been a volatile year so far for the Aussie nursery retailer. We take a closer look

Read more »

woman holds sign saying 'we need change' at climate change protest
ETFs

3 ASX ETFs that invest in companies fighting climate change

If you want to shift some of your investments into more ethical companies, exchange-traded funds can offer a good option

Read more »

a jewellery store attendant stands at a cabinet displaying opulent necklaces and earrings featuring diamonds and precious stones.
⏸️ Investing

The Michael Hill (ASX: MHJ) share price poised for growth

Investors will be keeping an eye on the Michael Hill International Limited (ASX: MHJ) share price today. The keen interest…

Read more »

ASX shares buy unstoppable asx share price represented by man in superman cape pointing skyward
⏸️ Investing

The Atomos (ASX:AMS) share price is up 15% in a week

The Atomos (ASX: AMS) share price has surged 15% this week. Let's look at what's ahead as the company build…

Read more »

Two people in suits arm wrestle on a black and white chess board.
Retail Shares

How does the Temple & Webster (ASX:TPW) share price stack up against Nick Scali (ASX:NCK)?

How does the Temple & Webster (ASX: TPW) share price stack up against rival furniture retailer Nick Scali Limited (ASX:…

Read more »

A medical researcher works on a bichip, indicating share price movement in ASX tech companies
Healthcare Shares

The Aroa (ASX:ARX) share price has surged 60% since its IPO

The Aroa (ASX:ARX) share price has surged 60% since the Polynovo (ASX: PNV) competitor listed on the ASX in July.…

Read more »

asx investor daydreaming about US shares
⏸️ How to Invest

How to buy US shares from Australia right now

If you have been wondering how to buy US shares from Australia to gain exposure from the highly topical market,…

Read more »

⏸️ Investing

Why Fox (NASDAQ:FOX) might hurt News Corp (ASX:NWS) shareholders

News Corporation (ASX: NWS) might be facing some existential threats from its American cousins over the riots on 6 January

Read more »