Medibank Prospectus Details, page-185

MEDIBANK Private is well on the way to a successful listing on the sharemarket next month, with brokers reporting strong demand on the first day of marketing to retail investors.
It’s likely that the final price determined by the institutional bookbuild will be well above the maximum $2 a share paid by retail investors, and it’s safe to say the government has allowed for the recent market volatility in setting the price range.
“Clearly it seems interest in Medibank Private from private investors is strong,” said Bell Potter executive director Charlie Aitken. “I suspect Medibank is headed towards a very successful listing,” he said of the looming November 25 market debut.
Putting aside memories of Telstra, which fell sharply after its three share offers — mainly due to technological change — it is the government’s interest to make the privatisation of Australia’s largest health insurer a win for retail participants, and there are reasons to believe that will be the case.
While Medibank Private’s indicative retail price range of $1.55-$2 is wide, the implied forward price-to-earnings range of 16.5-21.3 times is near the low end of its healthcare peers.
A sizeable 750,000 retail investors pre-registered interest in the float, which guarantees they can get a “marketable parcel” of shares in the IPO, and Medibank Private members can get an extra 30 per cent stake on top of that. But brokers say their retail clients have been applying for a much greater allocation of Medibank shares. And if the institutions don’t get enough shares, they may be forced to buy on market.
“None of my clients have said no to the offer so far,” said Patersons senior client adviser Peter Morgan. “I’ve had stronger interest in Medibank Private than the Telstra floats.
“I think they are going to give a preference to voters over the instos, so my guess is that the public could end up with about 60 per cent. There are a lot of index funds who will need to buy this stock because of its likely inclusion in the S&P/ASX 100. They will probably end up buying from retail clients, so I see a potential stag profit for retail investors.”
For Australia’s $550 billion self-managed superannuation pool, buying Medibank Private on a price-to-earnings discount to most of its peers, and an implied “normalised” dividend yield of 3.5-4.5 per cent should be a no-brainer.
But the bigger question for investors is whether investors believe Medibank Private can boost membership and cut costs. It has lost members in the past two years, and its cost ratio is near the high end of peers.
Sceptics have also raised concerns about the emergence of “comparison websites” that could entice members to exit Medibank Private.
But healthcare is a growing industry due to an ageing population. According to the prospectus, Australia’s private health insurance industry has grown at a compound annual growth rate of 8.4 per cent in the past decade. And Medibank has a 30 per cent market share, the biggest of its peers.
“If Medibank runs an advertising campaign, it costs them less per member than any other firm because of their scale,” Patersons’ Mr Morgan said. “Now, the CEO’s pay will more than treble, and his job will be to bring in new members.”