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Medibank : BUY or NOT

October 30, 2014 | Team Kalkine
Medibank : BUY or NOT

Medibank IPO

Today, we bring you the updates on Medibank Private Limited. With the A$5.5bn Medibank’s Initial Public Offer (IPO) open, applications are invited from investors willing to acquire fully paid ordinary shares. This has been extended to investors in Australia and New Zealand. Australian Government has mentioned that profits from the sale of Medibank will be used for productivity-enhancing infrastructure.

Medibank which is Australia’s largest private health insurer having a 29.1% of market share is known to offer private health insurance (PHI), Overseas Visitors Health Cover (OVHC), and Overseas Student Health Cover (OSHC) through two brands, namely, Medibank and ahm. A huge Australian population has been covered by Medibank’s PHI, OVHC and OSHC policies. More precisely, Medibank has over 1.9 million Principal Policyholders and OVHC and OSHC customers.


Financial Highlights (Source – Company Reports)

As per the expectations, Medibank forecasted to generate 90% of its pro forma FY15 revenue from its Health Insurance business and remaining 10% from Complementary Services, which generate service fees, commissions and other income from contracted health management services, online and telephone-based health services, etc.

Further, the pro forma operating profit is forecast to increase by 10.5% from FY14 to FY15. Pro forma operating profit is forecast to increase by 20.1% from FY14 to FY15 in case the effect of the non-renewal of the Immigration Contract within Complementary Services is let off. The pro forma NPAT is forecasted to be $258.2 million in FY15 showcasing a high forecast return on equity. As at 30 June 2014, Medibank had zero debt on its balance sheet, and the same is expected at least till the date of Listing. As at 30 June 2014, Medibank Private had cash and investments of $2.2 billion.


Composition of Pro Forma Forecast FY15 Revenue (Source – Company Reports)

The Health Insurance Segment is steered through acquisition and retention of Policyholders, profitable PHI products, and claim expense management etc. The Medibank brand and the ahm brand further target customers at different life stages. Specifically, the Medibank brand provides a broad and flexible health insurance cover; and on the other hand, the ahm brand is distributed through comparison websites, ahm’s website and a call centre.

Based on Medibank’s expectations, a fully franked dividend of 4.9 cents per Share is ought to be paid in September 2015 in respect of the period from 1 December 2014 to 30 June 2015. Accordingly, the FY15 dividend yield is forecasted to be of 4.2% to 5.4% based on simple annualisation; and 3.5% to 4.5% based on FY15 NPAT. 


Assets (Source – Company Reports)

The IPO being put up is most likely to be settled by 28 November 2014. Under the offer, an indicative Price Range of $1.55 – $2.00 per Share; and 2,754 million total number of shares have been put up. Further, the offer includes the Policyholder Offer open to eligible Policyholders, the Employee Offer open to eligible employees, the Broker Firm Offer open to Australian and New Zealand resident retail clients of a participating broker, and  the General Public Offer open to Australian resident retail investors. Although Commonwealth is offering to sell 100% of the Shares in Medibank, it does retain the right to sell a lesser amount of shares under the offer in view of a successful Listing, market conditions, etc.

However, there are a few key points that cannot be ignored and need to be considered before getting stuck to the IPO opportunity. There is a possibility that the strategy which Medibank is adopting backfires and impacts market share and revenues alongside bringing any reputational damage. For instance, Medibank’s strategy in contracting, or choosing not to contract, with healthcare providers is targeted to improve value for money and Policyholder quality outcomes. Nonetheless, this may lead to loss of goodwill if found ineffective. At the same time, detection and recovery of improper claims would be prudent to avoid any increase in claims expense.

Another point to ponder over is the kind of value proposition Medibank proffers to ensure satisfactory agreements being executed with healthcare providers. Failure to do this may call for poor operating results. Also, the economic and market conditions may have a bearing on Medibank’s investments. Thus, lower than expected investment returns will hit its financial performance, as a part of the net profit is contributed from Medibank’s investment portfolio itself.


Components of the Change in Pro Forma FY14 NPAT to Pro Forma FY15 NPAT (Source – Company Reports)

Private Health Industry may also be mispriced or designed inappropriately. This basically should mean that Medibank needs to always be up-and-running in forecasting correct claims expenses, price assessments, etc. Additionally, rising healthcare costs may imbalance the affordability of PHI which may result in many higher-risk Policyholders holding PHI instead of the low-risk Policyholders. At the same time, Medibank needs to ensure compliance with government policies and regulations. Any adverse change to such policies may bring a jolt to Medibank’s regular operations.

Then coming to the Medibank’s IT systems and data integrity, any damage or loss of such systems and data may harm the business extensively. In view of the broad IT renewal program, Medibank needs to be very careful in replacing the core policy and customer relationship management systems for the Medibank brand and other associated projects while maintaining the timeline and budget. This may otherwise upset the customer service and regulatory compliances.

Yet another factor which poses huge risk is the competitive environment driven by technology enhancements. For instance, use of internet for selecting and purchasing appropriate policies after a thorough comparison may impact Medibank’s financial performance.


Australian PHI Industry Premium Revenue (Source – Company Reports)

On the other hand, Medibank has illustrated some improvement in cutting down its management expense ratio. Further, the increase in healthcare expenditure, attraction towards private health cover, market leader position and strong base, and ahm brand’s emergence as the fastest growing brand (although affected by comparison websites) may tend to bring some respite to Medibank.

Nonetheless, the rush for medibank IPO and overbidding by investors is wrapping up as a mystery. We would rather wait and watch for any winners in this race as we are little speculative of the returns from the IPO at this juncture.
 



 
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