11/10/2014 Medibank Private – the IPO | 2014-11-05T00:05

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Source: Medibank Corporate Affairs

Evan Lucas g+, MelbourneWednesday 05 November 2014 08:05

Medibank Private is about to become the largest public asset sale sinceTelstra – current estimates put the market capitalisation of the country’slargest health issuer above QR National’s 2010 listing.

The IPO will see retail andinstitutional investors offered2.754 billion shares at anindicative price range of $1.55to $2.00. The government ishoping to raise betweenA$4.269 and A$5.508 billion,resulting in a completeunwinding of its ownership.750,000 investors have pre-registered for the prospectusand the final broker firmreceived was $11.987 billion inbidding bids – that’s close to

2.1 times more than the total shares on offer (at $2).

In return, Medibank has only allocated $1.5 billion of the $12 billion bid – which issome haircut. Retail and institutional investors now have to battle it out for theremaining $3.5 billion of shares left. They may have to fight hard to get a piece ofthe action, considering the news out today.

There are several enticements for retail investors, which certainly explain thedemand.

Firstly, the IPO price is capped at $2 for retail investors, even if the book build seesthe price rise above this figure. Medibank (MPL) makes up 29.1% of the totalAustralian health insurance market (according to the prospectus) and holds thedominant position among the 33 different health insurance providers in the country.

Its market-leading position has helped group revenue. This is dominated by healthinsurance premiums, with over 90% of FY15 numbers generated by its corebusiness. Considering health insurance is the one form of insurance that has beenunaffected by slippage over the past three years, the revenue growth estimates of4.2% look conservative, as do estimated profit margins. Operating profit growth isestimated to grow by 10.5%, which should support a very respectable estimateddividend yield of 4.2% to 5.4%.

The first fully-franked dividend for the seven months to June 30 2015 is forecast at4.9 cents a share, representing an estimated payout ratio of 70% to 80%. This ishighly enticing, but investors are going to have to wait a while for their first payment,which is expected in September 2015.

Interestingly, the earnings estimates see MPL’s price to earnings (P/E) ratios for theindicative price range coming in at 16.5 to 21.3 times earnings.

This puts MPL’s pricing at an interesting level – Healthscope recently rejoined themarket priced at 24.9 times forward earnings. However, HSO is a health providerrather than a health insurer. The premium to market when compared to thehealthcare space looks justified – it trades at a forward P/E of 18 times earnings with

Will HeddenLondon

Travis RobsonJohannesburg

Stan ShamuMelbourne

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Medibank Private – the IPO

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a current P/E of 28.6 times.

The insurance sector trades at an estimated forward P/E ratio of 13.4 times forCY14, falling to 12.0 times earnings in CY15. Compared to listed rival NIB, it looksroughly on par with NIB, trading at a PE ratio of 19.1 times. Bear in mind, though,that NIB only has a market cap a quarter the size of MPL.

The major comparable names, such as AMP, Suncorp and IAG trade on forwardP/Es of 15.1, 13.2 and 13.8 respectively. Could it therefore be considered expensiveat $1.55 – 16.5 times earnings – let alone 21.3 times at $2?

The thing that’s likely to drive the P/E ratio down over the coming years is efficiency– costs have long been a major criticism of MPL as the impact of governmentownership has dragged.

Cost efficiency and claim management are the two expenditure points that MPLbelieves it can quickly shore up, increasing the likelihood of net profit estimates andpayout ratios. If management can indeed implement a path to capital efficiency, thecurrent price estimates will be more than fair.

This is why we’re pleased to be offering a contract for difference (CFD) grey marketin Medibank Private. The ‘grey market’ is priced by IG, based on where its clientsbelieve the day one closing price of the stock will be (the listing is expected on 25November).

Traders have bid the IG grey market to $2.20, which is now 10% above theindicative range and 5% above most analysts’ 12-month estimates.

However, as this is a normal two-way market, traders have already resisted a movehigher by starting to lock in profit, and some are even going short at or above the$2.20 price point, believing the moves are based more on rumour than fact.

Remember, the CFD ‘grey market’ is priced by IG, based on where its clients believethe day one closing price of the stock will be. The market enables traders to tradeCFDs on Medibank before it lists, giving them the ability to gauge whether the float isover- or under-priced. It should therefore be a good indicator of Medibank’s finalclosing price.

For traders who have an interest in Medibank and have a view on the closing priceon the first day of trade, the CFD grey market will be available on IG’s tradingplatform during the Australian trading hours of 10:00 to 15:59 (AEDT). Clients tradeoff a bid/offer spread, based on what they think the closing market price at the endof the first trading day will be, meaning all open positions will settle onMedibank’s closing price on its first day of trade.

We foresee market noise like the release of the broker firm numbers continuing todrive price spikes in Medibank in the lead up to the listing.

Please refer to the IPO Grey Markets SPDS.

This information has been prepared by IG, a trading name of IG Markets Limited. In addition to thedisclaimer below, the material on this page does not contain a record of our trading prices, or an offerof, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any usethat may be made of these comments and for any consequences that result. No representation orwarranty is given as to the accuracy or completeness of this information. Consequently any personacting on it does so entirely at their own risk. Any research provided does not have regard to thespecific investment objectives, financial situation and needs of any specific person who may receive it.It has not been prepared in accordance with legal requirements designed to promote the independenceof investment research and as such is considered to be a marketing communication. Although we arenot specifically constrained from dealing ahead of our recommendations we do not seek to takeadvantage of them before they are provided to our clients. See full non-independent researchdisclaimer and quarterly summary.

Shaun MurisonJohannesburg

Ryan HuangSingapore

Leigh RileyJohannesburg

Evan LucasMelbourne

David MaddenLondon

Chris WestonMelbourne

Chris BeauchampLondon

Brenda KellyLondon

Alastair McCaigLondon

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