As you may know the government has announced that they will be privatising Medibank. The prospectus for this transaction has now been released providing more detail in relation to the offer.
Below is a short summary of our research department’s view on the offer.
Investment case
Supportive demographic trend: Average private health insurance premium growth for the industry has been 8% pa since 2008. With an ageing population and increasing utilisation of health care services this should continue to grow, which will support a concurrent increase in Medibank’s revenue from premiums.
Benefits of privatisation: Medibank commenced operations in 1976 and has been under the ownership of the government ever since. While the company has been operating as a fully commercialised entity, like many government businesses, its subpar margins would suggest operational inefficiencies exist. Medibank Private’s net margins are currently less than 4%, compared to 5-6% margins generated by their for-profit peers. Privatisation would be expected to put a greater focus on cost control and profitability, with the aim of closing the margin gap. On margins this low even a small shift can have a big impact on overall profits.
Scale: Medibank currently pays over 85% of its revenue in claims. Given their position as the second largest payer of healthcare services in the country (behind the Government via Medicare), it is in a unique position to try and negotiate better pricing with providers of health care services, in a bid to further improve margins.
Sustainable dividend yield: Medibank is forecast to have a 4% fully franked yield, which we view as attractive, particularly when combined with strong top-line revenue growth potential, from the aforementioned demographic shifts.
Risks
Regulatory risk: Medibank operates in a highly regulated environment which is susceptible to significant changes in government policy.
Affordability risk: Given the increasing cost of health care and private health insurance, there is a risk that policy holders switch between funds in search of the most affordable cover. Similarly, there are risks surrounding policy holders downgrading cover due to cost. These factors could impact Medibank’s profitability.
Inadequate premium rate approvals: The government must approve all premium rate changes. If the government refuses Medibank’s premium rate increases there is a risk that margins will come under pressure, as costs rise faster than revenues.
We would like to point out a couple of issues to consider when deciding on whether to participate in the offer:
· Medibank is a good quality company in an attractive industry
· At this stage the end price is unknown, with an indicative price range being announced of between $1.55 to $2.00.
· Our analysis of the offer is that at the lower end of the price range the offer is attractive
· However demand is likely to be high and as such the price is expected to be set at the higher end of the range
· The offer closes on the 14th November
· Depending on your superannuation fund you may be able to participate in the offer via your superannuation account, however you will need to do so in advance of the 14th November cut off.
At this stage it is very difficult to make a recommendation in relation to the offer at hand, particularly as the actual price will only be announced after the offer for retail investors has been closed.
Therefore should you wish to discuss this further please contact our office.
