Medibank Prospectus Details, page-225

This is a massive call by Morningstar this morning
Medibank: A CBA-style IPO?

Christine St Anne | 23 Oct 2014Text size Decrease Increase | inShare Page 1 of 2 Christine St Anne is Morningstar's online editor. Follow her on Twitter @MstarChristine The wait is over. This week, the government announced the price of Medibank -- $1.55 to $2.00 a share, valuing the company at around $4.3 billion to $5.5 billion. Morningstar will be launching an IPO report on the healthcare provider and will continue its in-depth coverage when the stock lists in December. The IPO is of great interest to both retail and institutional investors who are hungry for growth opportunities. Although the government is looking to boost retail investor participation in the IPO, fund manager Don Williams is casting a close eye over the stock. As chief investment officer of Platypus Asset Management, Williams believes that IPOs are some of the few growth opportunities in the Australian market and he says there are some similarities between the Medibank IPO and the float of Commonwealth Bank of Australia (CBA) some years ago. In fact, in a recent video interview, Morningstar head of equities research Peter Warnes describes Medibank as being "almost bank-ish" given its 30 per cent market share. Easy wins on the cost front Those of us of a certain age can recall the days when CBA was a relatively "sleepy" bank. In the safe and steady hands of government ownership, the bank had all the hallmarks of a bureaucratic behemoth -- slow to respond and resistant to change. Twenty-three years after the bank floated and CBA is among the world's most competitive banks. It is a leader in technology (CBA is already in talks with the NSW government about the use of its cards on the state's transport system) and its steady and growing dividends have made the bank a darling among yield-orientated investors. The CBA IPO was arguably among the most successful government privatisations in Australian history. Williams believes the similarities between the CBA IPO and the Medibank IPO are on the cost and efficiency front. "As a large business Medibank has a few easy wins on the cost side," Williams says. "The business is well-positioned to grow its margins by implementing efficiencies and streamlining processes. Under a privatised model, Medibank can achieve these cost reductions, similar to what CBA achieved when it was privatised." Williams reckons the healthcare provider could achieve margin improvement of up to 200 basis points. However, this is difficult to forecast in the absence of a prospectus.
Page 2 of 2 In its pre-IPO report, Morningstar notes that more than 38 years of government control suggests network efficiencies were not a major focus. Morningstar's IPO report remains of the view that cost-cutting will be a focus for the company. While aggressive cost-cutting is unlikely, Morningstar's IPO report also notes that Medibank will be able to achieve "targeted improvements in productivity and operational efficiency, which will boost medium to long-term earnings". Early gains in profitability from productivity improvements will also be achieved as Medibank moves to become a more "shareholder-focused business". Morningstar believes that an increased focus on improving legacy processes, procedures, contracts and pricing is expected as management will become incentivised to grow the business, improve productivity, lower the cost base, drive up profits and boost returns on equity. The IPO report identifies a raft of cost-savings measures. "There is scope for the privatised Medibank to improve productivity by actively reducing its cost base while leveraging its scale to grow revenue. Profit and dividend growth will follow," the report says. "We expect cost savings across claims handling, complimentary services and corporate overheads. However, most opportunities for cost savings are in medical benefit claims costs through negotiating better deals with private hospitals and other service providers." Premium subscribers can click here to read Morningstar's Medibank pre-IPO report and click here to read the newly released Medibank IPO report.