Disclaimer: The information and opinions provided below are provided as general information only and is not personal advice. Forecasts are based on extracts from independent analysis carried out by Third Sector Advantage (TSA). We recommend conducting your own research and consulting with your adviser prior to making any investment decision.
Background
With a FY14 operating profit of over $255 million on gross revenues of $6.37 billion, Medibank Private is Australia's largest private health insurance provider. While the company has achieved significant growth in premiums over recent years, typical of Government-owned enterprises its profitability has under performed both its for-profit and not-for-profit peers.
The opportunity for investors, as it is presented, is to acquire shares in the public listing of Medibank Private and to benefit from potential improvements in profitability (though cost reductions, acquisitions and claims management) and more aggressive marketing.
Medibank's pro forma forecast for FY15 sets forth an expected increase in premium revenue of 6.2%, plus an increase in gross margin of 0.01% and reduction in management costs of 0.5%. Overall they are looking at increasing their Operating Profit margin from 4% to 4.3%.
While management have stated their expectations for dramatic improvement to their profitability margins we should keep in mind that Medibank is planning on following a well-worn path of other private health insurers (in fact there are 34 private health insurers, 10 of which already operate on a "for-profit" basis).
Medibank is the largest private insurer in Australia. They hold around 29.5% of the market, a lead of 2.7% over Bupa (26.8%). HCF, NIB and HBF together comprise 26% of the market, with the remaining 33% of the market spread across smaller providers. Although Medibank talk a lot about being the largest insurer (by market share), it is uncertain whether this represents a meaningful advantage to their company strategy, particularly as their market share is actually spread across two brands (Medibank Private & AHM).
Private Health Insurance (PHI) premiums are overseen and must be approved by the Minister for Health. This means that improving Medibank's bottom-line (relative to their peers) must come from efficiency improvements and better (stricter) underwriting. Whether this can improve their Operating Profit from 4% to 4.3% is one thing; whether they can do it while increasing premium revenue by 6.2% is another.
I will say that some of Medibank's expectations are entirely justifiable. Medibank's expense ratio, for example, is higher than that of the existing private-sector private health insurers. Others, such as their premium growth rates and operating margins seem less likely, and almost entirely contingent on the ageing population and an increasing dependence on private sector operators for healthcare services.... sure, they may be achievable, but you would want the wind to be blowing in the right direction for everything to pan out as planned, within the timeframe set out by management.
Given that management have some tidy performance bonuses linked to revenue growth (CAGR) I would tip that we are going to see Medibank (and AHM, which is part of Medibank) ramp up advertising in the coming years. In fact to think that Medibank will be able to eek out a profit margin equal to (or higher) than their peers without either losing market share or taking a gamble on super-aggressive marketing suggests that Medibank's management know something that their competitors don't.
The opportunity for investors, as it is presented, is to acquire shares in the public listing of Medibank Private and to benefit from potential improvements in profitability (though cost reductions, acquisitions and claims management) and more aggressive marketing.
Medibank's pro forma forecast for FY15 sets forth an expected increase in premium revenue of 6.2%, plus an increase in gross margin of 0.01% and reduction in management costs of 0.5%. Overall they are looking at increasing their Operating Profit margin from 4% to 4.3%.
While management have stated their expectations for dramatic improvement to their profitability margins we should keep in mind that Medibank is planning on following a well-worn path of other private health insurers (in fact there are 34 private health insurers, 10 of which already operate on a "for-profit" basis).
Medibank is the largest private insurer in Australia. They hold around 29.5% of the market, a lead of 2.7% over Bupa (26.8%). HCF, NIB and HBF together comprise 26% of the market, with the remaining 33% of the market spread across smaller providers. Although Medibank talk a lot about being the largest insurer (by market share), it is uncertain whether this represents a meaningful advantage to their company strategy, particularly as their market share is actually spread across two brands (Medibank Private & AHM).
Private Health Insurance (PHI) premiums are overseen and must be approved by the Minister for Health. This means that improving Medibank's bottom-line (relative to their peers) must come from efficiency improvements and better (stricter) underwriting. Whether this can improve their Operating Profit from 4% to 4.3% is one thing; whether they can do it while increasing premium revenue by 6.2% is another.
I will say that some of Medibank's expectations are entirely justifiable. Medibank's expense ratio, for example, is higher than that of the existing private-sector private health insurers. Others, such as their premium growth rates and operating margins seem less likely, and almost entirely contingent on the ageing population and an increasing dependence on private sector operators for healthcare services.... sure, they may be achievable, but you would want the wind to be blowing in the right direction for everything to pan out as planned, within the timeframe set out by management.
Given that management have some tidy performance bonuses linked to revenue growth (CAGR) I would tip that we are going to see Medibank (and AHM, which is part of Medibank) ramp up advertising in the coming years. In fact to think that Medibank will be able to eek out a profit margin equal to (or higher) than their peers without either losing market share or taking a gamble on super-aggressive marketing suggests that Medibank's management know something that their competitors don't.
Expected Outcome for Investors
To buy or not to buy?
In my opinion the IPO does not offer sufficient "upside" for investors to warrant investment. The company itself will, I am sure, continue to flourish and make many (if not all) of the efficiency improvements that are being presented by management, however at a price of up to $2.00 per share the value (relative to alternative investment opportunities) does not adequately compensate for the risk of investment. For my money I wouldn't consider paying anything above $1.37, and even then I would need some convincing.
Till then it's worth remembering that often the best way to make money is to avoid losing money. This appears to be one of those times.
Updates
Final pricing of the shares was set at $2.00 for retail investors and $2.15 for institutional investors.
Shares opened trading on the Australian Stock Exchange 12:00 pm 25 November 2014 at an opening price of $2.22 (closing day $2.14)
Till then it's worth remembering that often the best way to make money is to avoid losing money. This appears to be one of those times.
Updates
Final pricing of the shares was set at $2.00 for retail investors and $2.15 for institutional investors.
Shares opened trading on the Australian Stock Exchange 12:00 pm 25 November 2014 at an opening price of $2.22 (closing day $2.14)