Medibank Private: 10 reasons to register for the IPO

The Federal government’s plan to privatise Australia’s largest health insurer, Medibank Private, is a week away from closing.

Investors have until October 15 to register their interest to buy shares in the float, and we’d suggest that if you are serious about investing, you need to register to receive an allocation of shares. If you are a Medibank Private policyholder, you have even more reason to register, with expectations that policyholders will be offered either more shares, discounted shares or a combination of both when Medibank floats on the ASX.

If previous government floats, such as CSL Limited (ASX: CSL), Commonwealth Bank of Australia (ASX: CBA) and Telstra Corporation Ltd (ASX: TLS) are anything to go by, investors will be getting good value for their money.

Here are ten more reasons why investors will want a piece of the Medibank float…

  1. A leading market share of close to 30%, slightly ahead of its closest competitor BUPA, and well ahead of HCF, NIB Holdings Limited (ASX: NHF) and HBF.
  2. The government’s incentive not to stiff voters, by making the price attractive. They also want to see the float be successful, and can’t do that with an unreasonable price, so there should be plenty left on the table for retail investors.
  3. Medibank has lower profit margins than the listed NIB in 2010-11, but as a government-owned entity, it’s likely to not be as efficient as a private enterprise. Management expenses are high compared to the industry, so Medibank has the ability to grow its margins through cost cutting and efficiency programs and become a leaner, meaner company.
  4. Despite what Mathias Cormann says, Medibank is likely to raise insurance premiums. Rises are strictly controlled, but once the company is beholden to its new owners (shareholders), it has more incentive to ask the Health Minister for large premium rises annually.
  5. The government is well aware of the cost of providing free health care, and as such, we can expect a greater push by future governments for taxpayers to take on private health insurance.
  6. Customers are sticky with more than 25,700 health insurance products out in the market making switching a confusing process. The Australian Dental Association says competition is limited because it is impossible for contributors to make accurate comparisons of private health insurance.
  7. Medibank is expanding into travel, life and pet insurance, giving it additional levers to drive growth.
  8. Medibank has a dominant market share in Victoria and Queensland, but the opportunity to increase market share in other states.
  9. In 2013, Medibank paid the government $450 million in dividends, as premiums rose 6.2%. From $5.3 billion in premiums, the insurer reported a $233 million net profit.
  10. As an insurer, Medibank retains a float of premiums paid to it, which it can invest to earn income on. At the end of June 2013, Medibank had $900 million in cash, and another $1.5 billion in investments.

As a member of Medibank Private, I’ve registered both for my personal portfolio as well as my self-managed super fund. You might want to register – the process takes less than 5 minutes, and could be healthy for your portfolio.

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Motley Fool writer/analyst Mike King owns shares in CSL and Telstra, and is a policyholder in Medibank Private. You can follow Mike on Twitter @TMFKinga

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