Is Medibank A Good Buy?

A lot of people have asked if purchasing a few Medibank shares would be a good investment.

It’s a good question. There’s been a lot of conjecture around the upcoming Initial Public Offer (IPO) and a number of investors feel uncertain about what to do. And for good reason. Some analysts believe it has a very healthy future while some others are not so sure.

So what does Suncow think?

To help answer this question, let’s look at it in three parts: (i) why the government is selling; (ii) the quality of the business; (iii) and the price you should pay for it.

Why is the Government Selling Medibank?
In short, the Federal Government inherited a mountain of debt and now they need to hock whatever furniture is left to pay it down. But to be honest, selling Medibank for $4.5b won’t make much difference but it’s our only option until the Government begins increasing taxes, which seems inevitable.

Is Medibank a Good Business?
Without getting bogged down in all the numbers, Medibank is a very good business. It has a 30% market share, excellent cashflow and a very good history of profits which looks likely to continue. It also has a strong balance sheet.

Like most government businesses, it is embedded with many inefficiencies which makes it an attractive offer. If the excess can be excised, Medibank will show a steady increase in profits, dividends, and ultimately, its share price. I would expect management to extract the extra value for shareholders over the medium term.

As an industry, insurance is a “hurt’em and heal’em” business. Their goal is to show you how much life will hurt if you don’t have insurance cover, and how much they can heal it if you do. It’s quite an emotive sale.

From a macro point of view, the population will continue to grow and live longer so the demand for health cover is expected to continue. As far as healthcare stocks go, it is relatively low risk.

Risks
The main risk to this business will be any changes in government policy. If healthcare costs increase it could result in customer attrition. Similarly, a run on claims resulting from a pandemic or epidemic could also add to the risk profile of the business.

Competition could be a concern but with the business about to be privatised, Medibank should also become more competitive as well.

Other Government IPO’s
History shows most Government share offers have been stellar performers. These include the Commonwealth Bank (listed in 1992 at $6, now $83), CSL (listed in 1994 at $0.80, now $79) and Aurizon (formerly Queensland Rail, listed in 2011 at $2, now at $4.66). Try and find an investment property which has performed as well as any of these businesses…and with better yields!

The only exception here is Telstra II which listed at $7.40 in 1999 and is currently trading at $5.60

What Price Should You Pay For It?
The indicative price range for Medibank is $1.55 – $2.00. Final price to be confirmed in a few weeks.

At $1.55, it has a price earnings ratio of 16.5 and a dividend yield of 4.5%, which I think is good value. At $2.00 it has a price earnings ratio of 21.3 which is starting to get a little expensive. However at that price, it still has a dividend yield of 3.5%.

Therefore, given the demand for IPO’s has been white hot lately, I would expect the demand for Medibank to be just the same. I expect it to list around $2.00.

That said, I would expect the government to leave some upside in the stock and look after voters. No one wants a repeat of Telstra II.

So on balance, I think Medibank has a very healthy future. It’s won’t be the sexiest stock on the market which in some ways makes it more attractive. I think it will be a good stock to buy and hold as long as you get it at the right price.

Have a great week!

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This information has been prepared without taking into account your objectives, financial situation or needs. Before making a decision based on this material, you should consider its appropriateness in regards to your objectives, financial situation or needs. You should seek advice about how the relevant laws impact on your particular circumstances. Suncow Wealth Pty Ltd is a Corporate Representative No.441116 of AFSL 393254.