The Medibank Private initial public offering (IPO) has certainly generated an enormous level of excitement within the market. Fund managers are scrambling for their fair share of the government-owned health insurance business while mum and dad investors are licking their lips at the prospect of making a handy 'stag' profit on the day of the float.
As it stands, the indicative price range for the stock is set between $1.55 and $2.00, but it may open above that price. In fact, The Fairfax press even reported that the stock is currently trading in a pre-listing shadow market operated by IG Markets at $2.15. Considering the price has been capped at $2.00 for retail investors, that sounds like a very nice way to make a quick buck.
But the question that really needs to be asked is…
Is it really worth the hype?
Granted, it's pretty rare that you get a company that size of Medibank listing on the ASX. It's even rarer that you get one that is also Government-owned. That's why this IPO has been touted as being the biggest since the listing of Telstra Corporation Ltd (ASX: TLS).
The company certainly has its advantages and its appeals. It boasts a market share of roughly 29.1% in Australia and could greatly improve profits over the years by reducing costs and improving efficiencies. Although I have wondered why this hasn't been a key focus for the business over the last decade as its margins have declined against rivals such as BUPA, HCF and NIB Holdings Limited (ASX: NHF).
I'm also concerned about the insurer's aggressive growth strategy. In recent years, Medibank has benefited from its $2.2 billion investment portfolio – 18% of which is dedicated to growth assets. But this is also a key risk moving forward as volatility returns to the market which would have a direct impact on the group's overall profits.
While I would certainly be interested in buying the insurer's shares at the lower end of the indicative price range, it's not worth the hype at the upper end. At $2.00 per share, the shares will be trading on a P/E ratio of 21.3 times forecast earnings, which is far too great considering the risks facing the business – some of which I mentioned above.
In addition, it will only offer a dividend yield of 3.5% at that same $2.00 float price – or 5% when grossed-up for franking credits. While that's not bad, it certainly doesn't compare to some of the market's other tantalising dividend stocks such as Telstra. Even BHP Billiton Limited (ASX: BHP) tops Medibank's yield with a grossed-up 5.3% offering.
Here's what I'm doing instead
With just five days remaining until applications close for the IPO, some investors will no doubt be eager to get their hands on their fair share of the stock. But not me.
Why, you may ask?
Because I'm a value investor, and don't see the Medibank IPO as an attractive opportunity. Sure, if prices fall over the coming months, I'll certainly consider buying a parcel of shares, but not for now.
I acknowledge that there's a chance I might miss out on some quick gains on the day the stock goes public, but I am also eager to capitalise on a number of other opportunities that I believe are presenting as far greater long-term value right now.
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With most of the market's attention focused solely on the pending IPO, there are a number of other companies trading at extremely compelling prices and could be set to deliver investors with enormous profits in the years ahead.
