Tuesday, November 25 2014
Medibank Private has announced it will list at a price of $2.15. We elected not to participate at this price on valuation grounds. Specifically we note:
- The bidding process was well run ensuring a good price for the Government but not leaving much on the table for institutional investors who were encouraged to “bid hard and early”. This ensured institutional investors offered the best possible price they could afford.
- On our estimation there is around 5–6% p.a. return available over the next two years from this price which does not really justify the potential risks on investment.
The float has been well managed with 60% going to retail investors who are less likely to “stag” the float and as a result, we suspect the stock will be well supported in the aftermarket.
Management will then be under pressure to deliver. While there will be cost savings available, the key will be reducing claims via better negotiations with hospitals and increased intervention before expensive medical care is required. Progress in this regard will likely drive the stock and, while we fully expect steady progress, we highlight this will not necessarily be easy for a management team that has already had 13 years to deliver improvements.
We prefer to stay disciplined on valuation and if some selling emerges in the stock and drives it back to a more appropriate entry point then we will consider at that stage.
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