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Should you buy Medibank Private?

Attention all long-term investors: The prospectus for Medibank Private was officially released this morning.

Medibank Private, Australia’s biggest health insurance provider, will look to list on the ASX in early December.

The offer for retail investors will open on 28 October and close on 14 November.

What you need to know…

According to the prospectus, there’s many reasons why Australians who are willing to invest long-term should be excited about the Medibank IPO. Here’s what you need to know:

  • Indicative share price range of between $1.55 and $2.00 per share
  • Retail shareholders will have the price capped at $2.00 per share, even if the final price is above the indicative range
  • 2,754 million shares will be up for grabs
  • The minimum investment will be $2,000
  • Medibank FY14 net profit after tax (NPAT) was $258.5 million
  • Based on an indicative market capitalisation between $4.26 billion and $5.5 billion, the shares will priced on a P/E ratio between 16.5 and 21.3
  • The interim dividend (for seven months to 30 June 2015) will be 4.9 cents per share
  • Based on a 75% payout ratio of FY15 underlying NPAT, the stock will yield between 3.5% and 4.5%
  • Operationally, Medibank provides health insurance cover for over 3.8 million people in Australia, through its premium product (Medibank Private) and its low-cost brand, AHM.
  • It has a market share of 29.1%
  • The Australian healthcare industry is worth $147 billion, having grown at a compound annual growth rate (CAGR) of 7.9% from $68.8 billion in 2003
  • The Private Health Insurance industry generated approximately $19.3 billion in premium revenue in 2014 and has grown at a CAGR of 8.4% since 2004
  • Only 8% of total healthcare expenditure was funded by the private health industry
  • 55.2% of Australians have some form of private health cover
  • 90% of Medibank’s FY15 pro forma forecast revenue comes from health insurance, the remainder from complementary services
  • 73% of FY15 pro forma profit will come from health insurance, 22% from net investment income and 5% from complementary services
  • At June 30 2014, Medibank had tangible and liquid capital equivalent to 12.4%, ahead of regulatory requirements and the board’s policy of 12%
  • Medibank is a net recipient of risk equalisation payments. Meaning it gets paid from a fund created by the health insurance industry for taking on the extra risk of higher-claiming policyholders.
  • In a decade, Medibank’s revenue has grown from $2.5 billion to $6.4 billion
  • FY15 forecast: revenue growth of 6.2%
  • FY15 forecast: gross margin of 13.6%
  • FY15 forecast: management expense ratio (MER) of 8.7% (down from 9.2%)
  • FY15 forecast: operating profit margin of 4.9% (up from 4.4%)
  • FY15 forecast: Return on equity of 18.4%
  • At June 30 2014, its balance sheet had cash and cash equivalents of $2.2 billion (more than a third of its proposed market capitalisation)
  • Medibank is run by a highly experienced management team, led by MD George Savvides – who’s been in the role for the past 12 years

Should you buy?

Medibank has all the hallmarks of an excellent long-term investment:

Durable competitive advantage: check

Good profit margins: check

Excellent balance sheet: check

Long-term industry tailwinds: check

Juicy dividend yields: check

Fair price: check

Are there risks involved?

An investment in Medibank Private is not risk free, in fact it’s far from it, and it’s certainly not a stock I’d buy for a short-term ‘pop’ on the first day it goes to the market. However, in almost every way I believe long-term investors could do a lot worse than add Medibank shares to their portfolio or watchlist.

Telstra Corporation Ltd (ASX: TLS), CSL Limited (ASX: CSL), Westpac Banking Corp (ASX: WBC) and Commonwealth Bank of Australia (ASX: CBA) are four examples of excellent investments to come from ex-government IPOs. The difference is, Medibank’s market is growing much faster than the market of the big banks for example.

In summary, I plan on taking part in the IPO but will hedge my bets by keeping a healthy cash balance ready, in case the shares drop on the day they go public. If that happens, I’ll likely buy more!

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Motley Fool Contributor Owen Raszkiewicz has pre-registered for the Medibank Private offer.    

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