With the Australian share market up 34% in the past three years, the government has made easy work of floating its $5.7 billion health insurer, Medibank Private Ltd (ASX:MPL), which is set to debut on the Australian Securities Exchange tomorrow.
Despite many calling the float price of $2.15 overvalued, the market will be abuzz with excitement when the company's shares hit the ASX tomorrow at noon.
However, the company lacks the growth potential of its smaller rival, NIB Holdings Ltd (ASX: NHF) and will be forced to cut costs in order to improve margins and achieve forecasts.
However it appears investors aren't concerned by the unappealing prospects moving forward and are tightly focused on the potential for a stag profit. That is, an immediate jump in price on the first day of trading.
Let's just hope for those short-term sellers, there's enough buyers to get out in a hurry.
Unfortunately, at $2.15 per share, Medibank will be trade at 23 times forecast net profit in 2015 – 2016 and will pay an interim dividend of just 4.9 cents, or 2.2% in September 2015.
As a result I doubt many investors will be licking their lips at the opportunity to buy shares, particularly when you can buy the faster growing NIB for less than 19 times forecast profit.
Indeed after the all the hype surrounding the Medibank Initial Public Offering (IPO) has past, it could go the way of 2013's most exciting IPO, Freelancer Ltd (ASX: FLN). During its IPO in November 2013, the offer price of 50 cents produced a huge stag profit. However, after the immediate jump, its share price has fallen to just $0.55 today.
More likely, Medibank will go the way of Monash IVF Group Ltd (ASX: MVF). It debuted at $1.85 then spiked to $1.97 shortly after listing. This morning it opened at $1.41.
Many analysts have said a good price to buy Medibank shares is between $1.55 and $1.70. When they go on the market at $2.15 tomorrow we could the share price pop but as Freelancer and Monash IVF have shown, it might not stay there for long.
