When Switzer Super Report co-founder Paul Rickard analysed the Medibank IPO last October, he said that it was priced at the top end of the range and forecast dividends were “dressed up”.
The main story for Medibank was always going to be the cost out story and its success would depend on its ability to reduce its management expense ratio.
While the company delivered on its forecast, with an expected MER slightly better than the prospectus forecast at its recent first half results announcement, the market was not impressed. Perhaps some were hoping the prospectus forecasts were conservative and were expecting much better.
“If some analysts and investors thought this, then I would put this in the naive category. Unlike some earlier privatisations, Medibank has retained largely the same board and management team post privatisation – so it has always been unclear why privatisation would be that material an enabler to taking cost out,” Paul says on Switzer Daily today.
The company certainly did very well for a little while at the beginning of this year, getting as high as $2.59 before its first half profit results. However it is now around $2.05 and below the listing price of $2.11.
Source: Yahoo!7 Finance
The moral to this story could well be that not all government IPOs are great. At current prices, Medibank is trading on a multiple of 20.7 times FY15 earnings and 19.1 times FY16 earnings.
That might still be too high for Medibank and Paul says he’d only see value if it got down to $1.75, or a multiple of 16.3 times FY16 earnings and a dividend yield of 4.5%, instead of the 3.9% fully-ranked yield it is now expected to pay.
The five brokers that rate the stock on FN Arena are, in aggregate, relatively downbeat with only one Outperform (from Macquarie), three sells or underweights (UBS, Morgan Stanley and Credit Suisse) and one Hold (Deutsche Bank). The consensus target price is $2.21 with a range between $1.85 and $2.65.
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