It's pretty rare that a pending initial public offering (IPO) generates quite as much excitement as Medibank Private has. The floating of Medibank Private shares has investors on their toes and fund managers scared to say anything too negative in case the float turns into a roaring success.
The retail offer of up to $5.5 billion worth of shares begins today and ends on Friday November 14, and you can expect there will be a lot of mum and dad investors eager to get their hands on their fair share. However, before you commit your hard-earned savings to the rights to some of the insurer's shares, there are a few factors which you should seriously consider…
The Pros
- Expect a huge amount of activity on the day of the IPO. The stock could very well move into the ASX 50 which opens the door for many exchange traded funds and fund managers to swoop, meaning there could be a huge amount of price volatility.
- Retail investors have some certainty in that they know they won't pay a cent over $2.00 per share if they apply for a parcel of shares (up to $250,000). The minimum investment accepted is $2,000.
- You only need to look as far as Telstra Corporation Ltd (ASX: TLS), Commonwealth Bank of Australia (ASX: CBA) and CSL Limited (ASX: CSL) to realise how great ex-government IPOs have historically been. Over time, I have no doubt that Medibank Private could also deliver great returns.
- The company also boasts strong, durable competitive advantages and a solid position in Australia's rapidly expanding insurance market. It enjoys a market share of 29.1%, has grown revenue from $2.5 billion to $6.4 billion over the last decade and is expected to offer a very attractive dividend yield of somewhere around 4.2% (based on its prospectus notes).
The Cons
- Although Medibank Private might be one of the most well-known health insurers around the country, its net margins have seriously underperformed those of other companies in the industry. Medibank's net underwriting margin has averaged just 4.5% over the last three years, compared to BUPA's 6.5% margin, and the industry average of 5.8%. Of course, this could be viewed as a weakness or an opportunity for improvement.
- Regardless of the excitement around the IPO date, recently listed companies often retreat in price shortly after listing. It happened with many of last year's IPOs, including Veda Group Ltd (ASX: VED) and OzForex Group Ltd (ASX: OFX).
- The IPO range is expected to be between $1.55 and $2.00, indicating a prospective P/E ratio of between 16.5x and 21.3x earnings. That is very pricey compared to some of Australia's other insurers, such as NIB Holdings Limited (ASX: NHF) and Insurance Australia Group Ltd (ASX: IAG), which trade on forecast P/E ratios of 18.9x and 12.6x respectively. As such, I believe investors who remain patient could be offered an even more attractive price somewhere down the track.
As exciting as the Medibank IPO might be, it's very unlikely that I'll be taking part in the IPO. I acknowledge that there's a chance I might miss out on some quick gains on the day the stock goes public, but I am also eager to capitalise on a number of other opportunities that I believe are presenting as far greater long-term value right now.
