Investors, particularly retail investors, who partook in one of last year's largest initial public offerings (IPOs), namely the float of Medibank Private Ltd (ASX: MPL) are all grinning thanks to the company successfully listing at a premium to the retail offer price of $2 per share.
At the time of the book build which ultimately set the prices that institutional and retail investors would pay for the shares in Australia's leading private health insurer there was fierce debate about what the fair value of the stock was. With Medibank's shares currently trading at $2.39 the question of value is all the more critical now.
An overpriced stock certainly appears to be the view of analysts at global investment bank UBS. According to a report by the ABC, UBS believes the post-IPO rally has taken the shares into overvalued territory, leading the broker to issue a "sell" recommendation on the stock.
In explaining their recommendation the analysts stated:
"In simple terms, this reflects our view that the share's post-IPO performance appears to have captured virtually every positive theme but no negative ones."
In essence, it's not that UBS doesn't view Medibank as a decent business rather it is a matter of price versus value. On UBS's numbers, the insurer is trading on a prospective price-to-earnings multiple of 24x, compared with the broader market which is on 16x. In other words, investors are choosing to pay a hefty 50% premium to own Medibank!
While there are certainly some tailwinds and defensive qualities which make the private health insurance industry appealing, there are also plenty of risks and that is before you consider the risk of overpaying, as may be the case at $2.39. Investors who are keen to gain exposure to this sector may be better off considering smaller competitor NIB Holdings Limited (ASX: NHF).
