Shares of Medibank Private (ASX: MPL) will go live at noon tomorrow at a price significantly higher than what most investors were initially expecting.
It has been revealed that institutional investors have been allotted shares at a whopping $2.15 price tag, which is 7.5% higher than the upper-end of the original indicative price range, valuing the company at around $5.7 billion. Of course, this means that retail investors will recognise an immediate paper profit, given that their shares have been capped at just $2.00.
It gets better, too…
Given the enormous level of interest that the company has received, it wouldn't be surprising in the slightest if the shares soared well beyond $2.15 at some point tomorrow. This will be disappointing for investors who sat this IPO out, but the big question that needs to be asked is…
Can that price be sustained?
At $2.15, the shares will be trading on a projected P/E ratio of roughly 23 times FY16's estimated earnings. In comparison, fellow ASX-listed health insurer NIB Holdings Limited(ASX: NHF) is trading on a P/E ratio of roughly 17.7 times projected FY16 earnings, based on Morningstar forecasts. That comparison alone highlights the enormous level of hype that has already been built into Medibank's shares.
Sure, Medibank is a good business. It's Australia's largest health insurer covering some 3.8 million Australians, but then again, it has its faults too. As an example, its costs are still high while its margins are very low compared to its competitors like NIB, BUPA and HCF.
While management has outlined its plans to greatly improve these factors, the pressure will certainly be on for it to do so in the near future. If investors don't see progress after the first year or even the first half, the price could certainly come crashing back down.
What should investors do?
Like most other investors, I'll be watching Medibank closely in tomorrow's session. However, I won't be kicking myself for not applying for a parcel of shares.
Why?
Because at $2.15 (or higher), the shares do not present as good value. Although the shares could generate some great profits in the near term, I don't expect the returns will be anything spectacular in the long run – not from that price. You shouldn't even expect great dividends, with companies like Telstra Corporation Ltd (ASX: TLS) and Insurance Australia Group Ltd (ASX: IAG) offering far greater yields by comparison.
So instead of stewing on 'what could have been', I'm keeping my eyes open for other great opportunities on the ASX that are being largely overlooked in all this IPO hype. Some of them are trading at extremely compelling prices and could be set to deliver investors with enormous profits in the years ahead.
NEW: The Motley Fool's #1 Stock Pick for 2015 – Yours FREE!
