The Coalition could reap a windfall of up to $5.7 billion from the float of Medibank Private, although experts expect the government to sell at a lower price, to ensure a share price rise on debut.
Banks marketing the privatisation of the health insurer have said Medibank could be valued in the range of $4.1 billion to $5.7 billion when it lists on the Australian Securities Exchange in December.
Macquarie Bank analysts: “Medibank Private should trade at a premium to nib.” Photo: Ken Irwin
Finance Minister Senator Mathias Cormann has said the proceeds of the sale will be reinvested into “productivity-enhancing infrastructure”.
The top end of the valuation range is more than $1 billion higher than the expectation among analysts and fund managers of a market value for the industry leader of about $4 billion to $4.5 billion. That estimate has been suggested based on the comparable valuation of the only listed insurer, nib.
However, the banks have argued, in marketing research reports seen by Fairfax Media, that Medibank could trade at a premium to its smaller rival nib.
The three managers working on the float – Deutsche Bank, Goldman Sachs and Macquarie Capital – sent out reports on Monday in preparation for investor meetings in the next fortnight. The roadshow with potential investors will travel domestically, as well as to Asia, New Zealand and the United States.
Based on a multiple of Medibank’s net profit in the 2015 year of between 15 to 21-times – a measure used to determine how expensive a company is compared with its peers – Goldman Sachs said the company could be sold for $4.1 billion to $5.7 billion.
In comparison with nib, which trades on a forward price-to-earnings multiple of 18.5-times, Macquarie said Medibank could trade on a multiple of 18.4 to 21.5-times.
“Medibank Private should trade at a premium to nib, in our view,” the bank’s analysts wrote.
Omkar Joshi, an investment analyst at Watermark Funds Management, said the price looked “pretty fair”.
“It looks like they are pricing it in line with nib, which is probably the right price range,” he said.
However, Mr Joshi said he expected the government would prefer the stock to rise on debut, so would avoid pricing it too aggressively. “It’s not a good look,” he said. “Even if it’s what it is worth at the upper end of the range, it’s likely they would rather investors get the upside.
“Generally, with a government sell-down you won’t get them squeezing out the price too much.”
Medibank is the health insurance market leader, with 29 per cent of the $21 billion market. Newcastle-based nib, which has a market capitalisation of $1.3 billion, accounts for about 7 per cent of the sector.
In the past 12 months, nib’s valuation has increased to a point where its price-to-earnings ratio has moved from a small discount to the benchmark S&P/ASX 200 index, to trade at a 27 per cent premium.
Macquarie analysts said although nib was an efficient insurer, Medibank had greater scope to cut costs and improve its gross margins.
Deutsche Bank proposed a slightly more conservative valuation range of between $4.2 billion and $5.3 billion.
Deutsche’s analysts said Medibank should trade at a premium to domestically focused general insurers such as IAG and Suncorp because it has a “significantly stronger earnings growth outlook” compared with the peak of those companies’ earnings cycles.
However, they said Medibank should be relatively cheaper than healthcare stocks. Although the insurer is exposed to the same rises in health expenditure that benefits stocks such as Ramsay Health Care and Healthscope, it is exposed to a higher level of regulatory risk, they said.
The high valuation will be of little comfort to some of Medibank’s 3.8 million customers, who have been arguing they should be given free shares in the initial public offering.
The government has said eligible policyholders who pre-register to reserve a copy of the prospectus, which is expected to be released in late October, will receive preferential allocations of shares. However, it has said those customers are not eligible for a free stake because Medibank is a government-owned business, as opposed to a mutual, or member-owned organisation.
Policyholders who signed an online petition were considering a legal challenge on Monday.