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Medibank a short-term shot

Posted by on 16/04/2019

Good tidings: Christmas could be coming early for investors who participate in the sharemarket listing of Medibank Private.  

Investors who participate in the sharemarket listing of Medibank Private could receive an early Christmas present.

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While nothing is guaranteed when it comes to the sharemarket, demand for shares in the company is such that there is a good chance of the share price rising after listing.

That is because institutional investors will have to buy more shares on the market to come up to market weight in the stock. Investors could be presented with an opportunity to sell unwanted shares at a profit.

The prospectus for the float shows an “indicative” price range for Medibank Private shares of between $1.55 and $2 a share. Regardless of the final price of the offer, retail investors will not pay more than $2 a share on the first $250,000.

As a government privatisation, the government will want to ensure that the float is successful as shareholders are voters. And that has been the experience of past privatisations such as CSL and Commonwealth Bank and also even for Telstra and Qantas, at least in the short and medium term. On Medibank Private’s longer-term prospects, analysts are not so convinced.

They say that at a float price of $2 a share, the shares would be on a forward price-to-earnings (P/E) ratio of 21 times.

That looks expensive when compared to other listed companies in the insurance sector such as Suncorp, IAG and AMP, which are on forward P/Es of between 13 and 15 times, says Evan Lucas, market strategist with IG. NIB Holdings, the only listed health insurer, is on a forward P/E of 18 times.

To justify the high P/E, Medibank Private would have to be successful in cutting costs, Lucas says. However, he also says the revenue and profit margin growth estimates given in the prospectus do “look conservative”.

On a float price of $2, the shares would have an implied cash dividend yield for the 2015 financial year of 4.2 per cent. The shares are expected to be fully franked, giving an implied gross yield after franking credits of 6 per cent, which is good, says Elio D’Amato, chief executive of shares researcher Lincoln Indicators.

However, it is not as good as the big banks and Telstra, whose shares, after the recent falls in share prices, can be bought on gross dividend yields of between 7.8 per cent and 8.9 per cent, he says.

Michael McCarthy, chief market strategist at CMC Markets, says it could take Medibank Private some time to deliver the costs savings and the cultural transformation that the market expects. “I do struggle with the numbers and, I think, at $2, the stock is priced to perfection,” he says.

“If it gets a 50 per cent uplift in earnings that brings the P/E down from 21 times to 14 times, which is broadly in line [with the rest of the insurance market]”, McCarthy says.

“So there is a market expectation that there will be fast and efficient delivery of almost all of the improvements available in the business.”

Like the other analysts, McCarthy thinks the post-float share price performance is likely to be strong given the alignment of interests. “That usually plays out into a strong share price; at least initially,” he says.How do you get it?Retail investors can apply for shares from this Tuesday, October 28. The prospectus, which includes the application form, can be found at medibankprivateshareoffer苏州美甲美睫培训学校.au.The retail offer closes and applications are due by 11.59 pm (AEST) on November 14; though leave plenty of time before this date to apply.Final pricing and basis of allocation will be announced on November 25 when it will also be listed on a conditional and deferred settlement basis. Shares are expected to start trading on a normal settlement basis on December 5.

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