The sharemarket experienced a volatile June, with the S&P/ASX 200 Index (ASX: XJO) falling 5.5% during the month. All sectors ended the month in red, as concerns linger over whether Greece and the European Union can strike an accord to prevent Greece's exit from the Eurozone.
The ongoing negotiations dampened investor confidence globally, encouraging risk-off sentiment in stocks and causing Australian equities to fall. One stock that appears to have suffered amidst the contagion is Medibank Private Ltd. (ASX: MPL).
Medibank Private listed on the stock exchange in November with a closing price of $2.22 on its first trading day — 3.2% higher than the $2.15 price offered to institutional investors. The private health insurer was sold by the current government for $5.7 billion and offered to retail investors at a discounted price of $2.00.
Medibank Private's shares have experienced mixed fortunes, with the price rising to an all-time high of $2.59 a day before releasing its first results as a public company. After reporting results in line with forecasts, its shares gradually declined to the recent post-listing low of $2.00. I believe this decline is predominantly caused by weak global sentiment, and is not stock specific, presenting a great buying opportunity.
A cost-out story
Medibank Private operates in a mature market, with private health insurance reaching a saturation point in Australia. Population growth and Australia's ageing population means Medibank Private's success is reliant on its ability to reduce operating costs, purchase bolt-on acquisitions and gain market share from competitors.
In its inaugural half-year financial results as a listed company, Medibank Private stated it was on track to meet pro forma cost-cutting targets. Medibank Private managed to cut its management expense ratio to 8.42% and slightly grew customer numbers (despite losing 3% market share due to population growth), demonstrating there was plenty of "government slack" (that is, the inefficiencies associated with government enterprises) left in the business to drive efficiencies and claw back market share.
The market seemingly priced in better than expected figures, and so with Medibank Private's management simply meeting expectations, its shares fell in February this year. The shares have since been met with macroeconomic concerns causing a further share price decline.
Lack of growth
Analysts at UBS and Morgan Stanley forecast limited growth for Medibank given its inability to raise premiums in the highly regulated health insurance market. Further cause for concern is its internal competition with Ahm — Medibank's cheaper, white-label health insurer — which appears to be cannibalising sales of the premium brand. These factors suggest Medibank can only grow through bolt-on acquisitions, and as witnessed with Slater & Gordon Limited (ASX: SGH) last week, this roll-up model is littered with risk.
Foolish takeaway
Whilst I agree that Medibank Private will struggle to grow top-line sales, I see the current pullback in price as a chance to buy shares at fair value and capitalise on further cost efficiencies. With Medibank Private set to pay its maiden dividend of approximately 4.9 cents in September, the recent slump appears to present a great opportunity to purchase a quality company with defensive characteristics.
