On 25 November 2014, Medibank Private Limited (MPL) began trading on the ASX, raising $5.679 billion for the Australian government, making it the second largest IPO on record in Australia after Telstra and the third largest IPO in the world in 2014.
Healthcare in Australia is a $147 billion industry, representing almost 10 per cent of Australia’s GDP and private health insurance is an integral part of that industry. The Australian private health insurance industry generated premium revenue of around $19.3 billion over the last 10 years and continues to grow strongly. The Medibank Private health fund provides health insurance cover to more than 3.8 million people. It is Australia’s largest private health insurer with a 29 per cent market share. Medibank also has a small presence in New Zealand and Singapore.
Medibank Private’s offer was greatly oversubscribed and registrations to participate in the offer were heavily scaled back as a result of the government trying to ensure every Australian had the opportunity to participate in the offer. Issued at $2.00 per share for retail investors and $2.15 for institutional investors, Medibank listed strongly and rallied as high as $2.23 on its first day of trading before closing at $2.14. This meant that 440,000 retail investors enjoyed a 7% or $0.14 rise in the value of their shares. Given the high price-earnings ratio of 23-times, measuring how expensive a company is compared to its peers, pressure is on Medibank to perform as it values Medibank in line with health companies like CSL and at a 15 per cent premium to the only other listed insurer, nib. Time will tell whether Medibank will be able to manage this pressure and meet the forecasts as outlined in their prospectus.
Medibank private’s strenghts
The strengths associated with Medibank Private come from the fact that Medibank is Australia’s largest private health insurer built around a highly recognisable, long-established brand. In addition, Medibank presents positive healthcare and private health insurance industry fundamentals. The private health insurance industry is a key component of the Australian healthcare system, facilitating customer choice and helping alleviate funding pressure on the public healthcare system. Furthermore, Medibank Private provides an attractive financial profile with strategies in place to deliver disciplined forecast earnings growth.
Risk associated with Medibank private
Any investment in domestic equities comes with risks and Medibank Private Limited is no different. Along with general market risks, the specific risks associated to Medibank include the risk that Medibank Private’s strategy may not be effective, private health insurance products may be mispriced or incorrectly designed which may have an adverse affect on Medibank Private’s financial performance or result in a loss of Policyholders or both. In addition, rising healthcare costs may threaten the affordability of private health insurance. The sustainability of the private health insurance industry depends upon low-risk Policyholders holding private health insurance. Should private health insurance as a product category become unaffordable or unattractive for low-risk Policyholders, higher-risk Policyholders holding private health insurance will be become the majority of resulting customers resulting in an adverse effect on the private health insurance industry, including Medibank Private. Other risks include a competitive domestic market, regulatory changes and lower than expected investment returns. Historically, Medibank has on average been a 40-year, one-way growth story, however it is well known that the share market can be volatile and vicious and will often ignore reputations.