Senator Mathias Cormann and Medibank CEO George Savvides last week. Source: News Corp Australia The $4 billion plus privatisation of Medibank Private is the biggest test of the local stockmarket in years — specifically it’s a test of whether “mum and dad” are back in the market. Three quarters of a million people have already registered interest in this initial public offering and the prospects for privatising this solid business with a strong brand are promising. In the weeks ahead there will be a blizzard of opinion but in the end it comes to the terms of the deal, the potential performance of the company and the tempo of the market into which it is being launched ... here are 20 things you really should know. The Deal 1. Be warned. The final price could be expensive
The indicative price range for the shares is not cheap. They will cost between $1.55 and $2.00. The price-earnings ratio we are looking at is 17 to 21. Remember this is a health insurer, not a health care provider. The only realistic comparison is NIB — a smaller health insurer — which is very well run and trades on around 18 times. If the final price works out at the top of the range the p/e is looking expensive. 2. Your dividend yield looks modest
We are deep in the era of the “yield chase” and the government talks of a yield of 4.2 per cent at a $20 price but that includes a special dividend. As the prospectus shows the “normalised” yield on Medibank at $2.00 will be 3.5 per cent ... that’s not great. Bank stocks are offering up to 6 per cent. 3. You will not have to pay more than $2.00 a share
Apart from the measly “deal” offered to policyholders allowing them to get some extra shares at full price, if there is too much demand, the $2.00 “cap” is the only special term for ordinary “mum and dad” shareholders introduced by the government. 4. Exploit the timetable
The retail offer opens on Tuesday, October 28, and closes on Friday, November 14. In the interim we will get a clearer sense of demand. More importantly, we will know if the market pullback of recent weeks is well and truly over. Wait until near the end of the offer timetable to make your final decision.
The Company 5. Biggest is not always best
Medibank is the biggest of the health insurers but only by a whisker — it has 29.5 per cent of the market against BUPA with 26.8 per cent share. Unlisted insurers such as BUPA have more room to manoeuvre. 6. Medibank is relatively inefficient
If a company has regulated charges then its key pathway to profitability must be expenses reduction. Medibank has a higher expense ratio than the rest of the industry at 8.7 per cent against an industry average of 8.4 per cent — with Medibank’s economies of scale it should be the other way round. 7. Medibank lost a huge contract at a bad time
It’s actually been a mixed period for Medibank Private — it lost a very big contract with the Department of Immigration in the crucial lead-up to the float. The lost contract stripped $69 million off annual revenues. 8. One fifth of revenue is linked with investment markets
About 20 per cent of Medibank’s annual profit is due not to the operation of its insurance operations but the success of its investment arm. It means that there will be volatility in this part of the business: in financial 2013 net investment income was $144m but the year before it was only $43m. 9. Medibank is very good at achieving price hikes
It may operate with regulated prices, but Medibank this year has consistently managed to push through price rises that have been more than twice the rate of inflation (measured by the consumer price index). 10. The demographics are good, but are they well managed?
Healthcare-related industries are in a great position to benefit from Australia’s rich, but ageing, population. But Medibank has much to improve. One shining example: a whopping 35 per cent of claims come from 2.2 per cent of policyholders. 11. The boss
Managing director George Savvides has run Medibank Private since 2002 — that is a long time in corporate life and he has signed a new contract. The essential question is whether the leader who ran the operation under government ownership is the right person to run it as a stockmarket company? 12. Profit outlook is flat
Net profit after tax at Medibank Private in 2015 is expected to be more or less the same as 2014 at $258m — though operating profits at the company are expected to bound higher by a healthy 19 per cent, the bumper profits from investment markets in recent times is not expected to be repeated. 13. The relationship with hospitals and clients
When the blaze of publicity comes to an end in the wake of this float the wider public will know the company’s primary focus will now be to cut more profitable deals with hospitals and to improve its expense ratios: some policyholders may be more likely to switch to another insurer. 14. Lots of things could go wrong
Medibank itself concedes mispricing of products in the future could be costly. Likewise, any ineffectiveness at managing claims, difficulties with hospital contracts and specifically delays to an ambitious IT renewal program could damage its prospects. The Market 15. The market will tell you what it’s worth
We are back in volatile times on the wider stockmarket — no company including Medibank will be spared if the float is launched into a “down” market. Some privatisations have suffered in this way — T3 the final tranche of Telstra is a good example. 16. The market wants a big health insurer
Medibank instantly becomes a Top 50 stock, and the way the market works a whole load of fund managers must then buy the stock to fulfil their mathematical “weightings” into the local market. This is a short-term safety net. 17. Foreign fund managers will like it
The last reasonably sized privatisation in Australia was Queensland Rail, now known as Aurizon. In the weeks leading up to the float, local interest was muted. But foreign fund managers loved the stock and its Australian economic context. The same process is likely to happen with Medibank. 18. Privatisations can disappoint
CBA and QR were splendid privatisations. But Qantas — which was once trading at three times higher than its float price — today trades for less than its float price. Tabcorp, which was a great earner in its earlier years, has been fading for almost a decade. 19. Local demand remains unclear
There are early signs the institutional side of the offer in the form of “firm offers” is attracting very strong interest. But we will need to wait some weeks before there is compelling evidence of demand. 20. Medibank’s own policyholders have shown little enthusiasm.
The core shareholders at Medibank might have been its own policyholders if the government had offered a deal to them in the form of a special discount. The government refrained from this initiative and only 15 per cent of eligible policyholders registered for stock ... this is a poor response.
