Investors wanting to partake in the highly anticipated Medibank Private initial public offer (IPO) will need to get their applications in before 11:59pm tonight, or else run the risk of missing out on a potential 'stag profit' on the day of the float.
The 2,754 million shares on offer have been given an indicative price range between $1.55 and $2.00, indicating a P/E ratio between 16.5x and 21.3x projected earnings. However, given the unexpectedly high level of demand, it is fair to assume the shares will open at the higher end of the scale – or perhaps, even higher at around $2.10.
In fact, the Fairfax press even reported that some analysts are suggesting the shares could trade at a 20% premium to their issue price in their first week!
Should you buy?
In order to justify that higher price in the long term, the health insurer will need to heavily reduce its costs, strengthen its market position even further and make its margins more competitive against its key rivals BUPA, HCF and ASX-listed NIB Holdings Limited (ASX: NHF). While Medibank is a high-quality company (you can't maintain a market share of 29.1% without doing something right), $2.00 per share (or greater) does seem like an excessive price to pay.
If you're still unsure of your position at this stage in the applications process, your best course of action may be to remain on the sidelines and add the stock to your watchlist when it goes live on November 25. After all, there shouldn't be any rush to buy the shares, and basing an investment on the assumption that the shares will pop on day 1 would be more of a speculative move than sound investment strategy.
