The retail offer portion of the $4 billion float of Medibank Private is set to open 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've done some reading and found 10 interesting facts about Medibank that potential investors should weigh up:
- Medibank Private is an insurance company, but last year generated 22% of profit from its $2.2 billion investment portfolio. This portfolio, consisting of retained earnings and premiums for the year ahead, is what Warren Buffett loves about insurance companies and the portfolio is aggressively geared towards growth. The portfolio benefitted from strong equity markets last year to the tune of $144 million, the same cannot be expected this year. This is the opposite of QBE Insurance Group Ltd (ASX: QBE) that has struggled due to an overly defensive portfolio.
- The prospectus notes a dividend yield of 4.2%, however this first-year rate is actually an annualised rate of the 4.9 cents per share expected in the 7 months between listing and the end of the 2015 financial year. The following year will likely see the yield fall to around 3.5% based on a payout ratio of 75% and share price of $2. A yield nearing 6% can be generated by purchasing National Australia Bank Ltd. (ASX: NAB).
- Medibank has underperformed its peers. Net underwriting margin (the standard measure of margin in the industry) has averaged only 4.5% over the last three years. This compares with an industry average 5.8% and 6.5% from close rival BUPA. Investors could look at this as a pro or a con, either management needs to do better or the company has a lot more profit to squeeze out of operations.
- Medibank will likely jump straight into the ASX 50 index. As so many fund managers and exchange traded funds are restricted to the top 50, 100 or 200 companies, there will be immediate buying pressure from funds on IPO day.
- The retail offer is open from 28 October to Friday November 14 and the offer price will be somewhere between $1.55 and $2. Experts expect that as we get closer to November 14 it will become clearer what the issue price will be. Listed rival NIB Holdings Limited (ASX: NHF) has better margins than Medibank and trades on a PE ratio of 18. Medibank will list on a PE between 17 and 21.
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.
