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Medibank Private, Anyone?

Medibank Private, Anyone?

by Andrew Kuah

We just realized that my previous blog about Medibank Private wasn’t uploaded and I will explain why we are revisiting the stock further below. But firstly, here is what I have previously written about the listing of Medibank Private back in October last year.

Let’s begin with some of the global headlines over the week. China cutting interest rates and the European central bank promising more economic stimulus lifted the Australian dollar by 1 per cent or so against the greenback before falling back and continuing its slide the very next day. Many were not expecting the upsurge to be that short- lived. Iron ore price sinks below $70 a tonne hitting five- year low, putting further pressure on miners. The hype of the week, though, is one IPO. 

In Australia, investors were totally fixated on the Medibank Private IPO. Trading began on Tuesday at midday and as expected, it was a great start for “investors” (more like speculators) who were looking for a stag profit. Retail investors paid $2.00 per share and in early trading, jumped to around $2.20 before settling at $ 2.14 at the end of trading hours. A nice one day gain for those who sold it on that day but this is not unexpected as it was confirmed long before Tuesday that early retail subscribers will be allotted shares at a discount to the listing price. Fairfax media had a poll and apparently reporting about a quarter of them has planned to get rid of the shares immediately. 

For those who cling on to their Medibank Private shares like some of my friends, hopefully their decision pays off eventually similar to those who bought Commonwealth Bank of Australia and Woolworths at their IPO. However, the odds are very much stacked against them given its premium valuation – trading on a multiple of more than 22 times forecast 2015 earnings. For every success stories getting early at IPOs, there will be some which are equally bad. Myer is still trading 55% below their IPO price of $3.77 after five years. Even Telstra, which has more than double since 2011 is still trading approximately 22% below their tranche 2 float price of $7.40 in 1999.

At Valor, we strongly believe that the business operational performance is a key driver of the stock price over the long term. I see why it is over-hyped as it does have potential i.e. an ageing population with rising healthcare costs will provide a massive revenue tailwind. Having said that, there is no need to subside to the hype of panic buying or fear of missing out. It is no guarantee that it will a smooth sailing moving forward – at this valuation, it seems like nothing can go wrong and its potential growth is fully priced into the floating price. One major headwind is that the Government may now start to put pressure on the private health insurers ‘revenue margin to encourage more people to move to private health and take pressure off public health expenditure since it has no direct commercial interest now after the privatization float. 

We are not ruling out the possibility of getting in if it trades at our perceived fair value or a more sensible price that offers a sufficient margin of satefy. We will wait patiently. 

The above is purely the opinion of the author and does not represent the view of the company as a whole.

Since then, Medibank Private’s share price kept rising for the first 3 months to record a 2015 high of $2.59 in February. With reference to the previous blog entry, I have to be honest that it was not easy facing the same group of friends who owned the stock and hang onto it after I gave them my opinion that it was over-priced.

But things started to change after the release of their first half earning reports at the end of February and have steadily declined ever since. The stock is now trading at $2.05, down by 20% from $2.59. The first half results did show improvements in reduction in management costs and expenses but even at the current price, it is still trading at more than 20 times forecast 2015 earnings. The questions you have to ask are if they can keep cutting costs and improve efficiencies as promised and will they continue to grow earnings given the headwinds that was mentioned in the previous article, fierce competitions from other major insurers like Bupa and NIB and don’t forget Medibank’s own discount brand, ahm Health Insurance which would all drive tighter premium revenue margin moving forward.

Go to: http://www.health.gov.au/internet/main/publishing.nsf/Content/privatehealth-summary-premiumincreases, with the average premium increase of 6.18% effective 1 April 2015, the cost of maintaining a health insurance policy is getting more expensive and albeit this also affects the other players like Bupa and NIB, it will not be surprising if more people turn to cheaper alternative like ahm which apparently has already achieved growth of 20% in new policyholder numbers. While you may think ahm’s growth is good for Medibank Private stakeholders, this is only partly true, as I’m only using them as one of the low- margin providers but you get the gist. This also means Medibank’s core premium service will be adversely affected by the trend of switching.

Besides its lofty P/E valuation, its Price to Book Value is at 4.41 (most recent quarter figure from Yahoo! Finance) in comparison to Berkshire Hathaway’s Price to Book Value of 1.39. Who would you rather?

 

We think Berskhire Hathaway is essentially an insurance company hence using them for comparison purpose as noted above and besides the sheer size difference of the two companies, who do you trust more in better managing and investing the “float” which is where Warren Buffett, Charlie Munger and their investment managers work their magic.