MENU

Should you buy into Medibank Private’s IPO?

The listing of government-owned Medibank Private is set to be one of the biggest initial public offers (IPOs) in recent memory. More than 750,000 people expressed their interest in the sale and with the retail offer now open, investors are faced with the decision:

Whether to buy Medibank now, or wait…

As it stands, the shares are expected to be priced between $1.55 and $2.00. Given the high level of excitement surrounding the float, I wouldn’t be surprised if they listed at the upper end of the spectrum, or maybe even higher. As a result, you’ve got a large pool of investors who are terrified of missing out on the potentially big gains.

However, there are others, like myself, who feel the hype surrounding the IPO might be a little overdone. Below, you’ll find five arguments suggesting why investors should partake in the offer, as well as five arguments which might make you reconsider…

The Advantages

  1. Privatisation. Companies that have been sold by the government have a strong track record for delivering incredible shareholder gains. Just look as far as the privatisation of Commonwealth Bank of Australia (ASX: CBA), CSL Limited (ASX: CSL) and Telstra Corporation Ltd (ASX: TLS). In 20 years’ time, we could be adding Medibank to that lucrative list…
  2. Price. Mum and dad investors have been guaranteed a price cap at $2.00 per share, regardless of what the institutional investors end up paying. Should the shares open higher than the indicative price range, this will result in an instantaneous gain.
  3. Growing Healthcare Sector. The Australian healthcare sector is growing at a good rate, thanks in large part to our expanding and ageing population. This is also resulting in buoyant growth in Australia’s private health insurance industry which has enjoyed a compound annual growth rate in revenues of 8.4% over the last decade.
  4. Market Share. Medibank Private controls an estimated 29.1% of the Australian market, providing health insurance to over 3.8 million people in Australia through its Medibank Private and AHM brands. In addition, AHM is amongst the fastest growing health brands within the top-20 insurers.
  5. Room for Improvement. Although it is one of Australia’s largest health insurers, Medibank is significantly lagging behind its competitors in terms of costs and margins. This could be the key to huge earnings growth over the coming years.

Those are some pretty nice advantages, but let’s take a look at the other side of the equation…

The Disadvantages

  1. The Valuation. While the $2.00 price cap could benefit retail investors early on, the shares could be trading on a forward P/E ratio of 21.3x earnings (or higher). That’s quite pricey, especially when compared to the valuations commanded by other Aussie insurers such as NIB Holdings Limited (ASX: NHF) and Insurance Australia Group Ltd (ASX: IAG).
  2. Management. Managing Director George Savvides has run the business for 13 years, yet appears to have made little progress in reducing costs and improving overall productivity. The question that needs to be asked is whether that will necessarily change simply because the company lists on the ASX.
  3. High expectations. To expand on the above two points, a P/E ratio of 21.3x could imply that investors believe the company’s problems will be fixed in the relatively near term. Instead, it will likely take the company quite some time to resolve these issues, and a pullback in the share price could be the result.
  4. Growth. As was highlighted here, much of Medibank Private’s growth has come from its $2.2 billion investment portfolio which employs a far more aggressive approach to growth than that of its rivals. This has proven advantageous in recent years, but could actually stunt growth as volatility begins to return to the Australian share market.
  5. Core Brand. Although AHM is recording strong growth, the core Medibank brand has struggled to grow its customer base as a result of heightened competition. In fact, the number of Medibank-branded policies has remained at 1.6 million people in the past three years, indicating that its AHM business could be cannibalising growth in the core brand.

With those advantages and disadvantages in mind, I should note that my most likely course of action will be to sit this IPO out. While I would be more than happy to pay for the shares at the lower end of the indicative price range, I’m not sure there is enough margin of safety at the higher end.

While I could very well miss out on some early gains on the day the stock goes public, I am more eager to capitalise on some of the other opportunities that I believe are presenting greater long-term value right now.

The Motley Fool's #1 stock for 2015 - Yours FREE!

With most of the market's attention is focused on the pending IPO, there are a number of other companies trading at extremely compelling prices, which could be set to deliver investors with enormous profits in the years ahead.

Our top investment advisor, Scott Phillips, has just named his #1 stock pick for 2015 and I think the stock is a fantastic buy at today's prices. You can get his full report on this ultra-promising ASX stock absolutely FREE.

Simple, click here, enter your email address, and we'll send you his report.

Motley Fool contributor Ryan Newman does not own shares in any of the companies mentioned.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss a very important event! Chief Investment Advisor Scott Phillips and his team at Motley Fool Share Advisor are about to reveal their latest official stock recommendation. The premium “buy alert” will be unveiled to members and you can be among the first to act on the tip.

Don’t let this opportunity pass you by – this is your chance to get in early!

Simply enter your email now to find out how you can get instant access.

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our Financial Services Guide (FSG) for more information.