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Transcription of Finance News Network Interview with AMP Limited’s (ASX:AMP) AMP Capital Investors Head of Investment Strategy and Chief Economist, Dr Shane Oliver and Shaw Stockbroking’s Senior Investment Advisor James Gerrish.
Lelde Smits: Hello I’m Lelde Smits for the Finance News Network and joining me to discuss the Australian Government’s highly anticipated upcoming float of Medibank Private Limited (ASX:MPL) is AMP Limited’s (ASX:AMP) AMP Capital Investors Head of Investment Strategy and Chief Economist, Dr Shane Oliver and from Shaw Stockbroking, Senior Investment Advisor James Gerrish. Shane, James, welcome.
Shane Oliver: Good to be here.
James Gerrish: Thanks.
Lelde Smits: Float fever is rising around the upcoming privatisation of Medibank Private Limited (ASX:MPL). Shane, who sets to benefit most here?
Shane Oliver: I think that there’s two groups that will benefit, but obviously the biggest one is probably the Australian tax payer who will see the level of government debt in Australia go down to the tune of the amount of money that raised by the float. The other beneficiary of course is just ordinary investors getting a greater exposure to a chunk of the Australian economy.
Lelde Smits: And James, where are you anticipating that we will see the greatest interest and biggest take up?
James Gerrish: I think retail investors will take up this float. We’ve seen a lot of strong demand through the retail, well through the broker book build process that’s been happening at the moment. Of course, it’s going to be a large cap Australian company listed on the ASX in a growth sector; so I think institutions will also want to participate, so there will be strong demand throughout the market for this one.
Lelde Smits: What is your 12 month price target for the stock and what kind of price to earnings (PE) ratio does that represent?
James Gerrish: We’ve got a $1.97 12 month price target, we’ve used fairly conservative assessments or assumptions to get that price target. That will put it on a 2016 PE of 18 times. If you’re looking at a PE from 2015 numbers it puts it on a 21.3 times earnings.
Lelde Smits: If we can look closer at the health insurance market, what kind of growth projections do you have for this sector?
Shane Oliver: This sector is going to have strong growth. The bottom line is that Australians are ageing, we’re living longer, and more importantly, as years go by there’s more and more spending on health related things that obviously help keep people living longer. The technology is getting more sophisticated and that all requires money to pay for it. If you typically look at the Australian consumer price index, the components of that, it’s the health index, the health component, the cost of health, that’s rising the most rapidly each year, typically by about 5-6 per cent and when you allow for volume growth there as well you’re looking at growth in the area of around 8-10 per cent per annum. It’s a strongly growing part of the Australian economy and obviously Medibank Private will get access to that.
Lelde Smits: No matter how good a company looks on paper the Minister for Finance Mathias Cormann has warned, “The value of shares can go down as well as up”. Shane, what do you believe are the biggest risks we should be aware of in the health care sector?
Shane Oliver: The healthcare sector is quite a stable part of the market overall. It’s often seen as a staple or defensive part because it’s exposed to longer term growth. I guess a bigger risk might be that at some point interest rates start to rise and that could put some of the defensive parts of the market under pressure, particularly the high yielding part so that’s probably the biggest risk. At this stage though that looks to be a fair way off.
Lelde Smits: Looking closer at Medibank Private, what sort of risks have you identified for the company specifically?
James Gerrish: I think in relation to Medibank specifically the competition in the sector has intensified over the last few years. We’ve had the invent of a lot more online distribution of health insurance; you’ve got the rise of comparative websites so that I guess arms the consumer with a lot more information. We’ve seen a flow on impact there that we get a lot more churning of policies, so individuals going out there looking for better deals. I think, you look at Medibank, it is an insurance company so it does invest people’s premiums, so there is that risk around the potential investment outcomes that that may have. And lastly, Medibank is undergoing a large IT infrastructure upgrade, so I think – we all know how complex it is putting an IT system through a very complicated organisation that does have its own risks and I think that’s probably the top three risks from a company specific point of view that I’d see.
Lelde Smits: What kind of earnings profile are we looking at here and what short-term key performance indicators will you be paying attention to?
James Gerrish: From an earnings point of view, Lelde I think 2015 earnings are going to be fairly flat. Unfortunately, they’ve just lost a large government contract with the Department of Immigration fairly ironically. In relation to 2016, again going forward we’re expecting earnings per share growth of 13% per annum; so that’s a fairly strong earnings outlook for Medibank. I think in the very short term, it’ll be management’s ability to strip out some of the costs involved in the business, increase the margins so they’re achieving. They’re well below the other industry players in the sector so I think there’s a lot of room there to strip out some of the costs and get it to be operating a more efficient, in a more efficient way.
Lelde Smits: Shane, what will be the most important factors to Medibank’s profitability going forward?
Shane Oliver: Well, I think as James said, it’s really about containing costs so you’ve got a strong growth environment. The industry that Medibank Private will be operating in will be doing very. The key I think is to control the costs and then following on from that, I’d be focused on how competitive the sector becomes. There are a few strong competitors in there and obviously it’s how well Medibank Private competes with the industry. Obviously the rest of the industry will be trying to take share off Medibank Private as time goes by and Medibank Private will have to respond to that.
Lelde Smits: James, you are an investment advisor but will you be getting involved in the float?
James Gerrish: Yes, I think it’s a good one. We’ve been suggesting that clients take a good hard look at Medibank Private. I think you’ve got to understand that it is in the context of a diversified portfolio but it does look good from my point of view.
Lelde Smits: Fantastic. Well Shane and James, thank you so much for your insights today.
Shane Oliver: My pleasure, thanks for having me
James Gerrish: Thanks Lelde.
Ends
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