Australia's leading private health insurer Medibank Private Ltd (ASX: MPL) is now approaching six months as a listed entity and happily all initial public offering (IPO) retail investors are still sitting on a gain.
Those gains aren't as spectacular as they were a couple of months ago however…
After floating at $2 per share in late November, the share price rallied and touched $2.59 in February – providing retail IPO shareholders with a paper gain of 29.5%! Since hitting this high however it has been a slow-and-steady decline with the share price closing last Friday at just $2.15.
The decline in Medibank's share price over the past three months is at odds with the group's only listed peer, NIB Holdings Limited (ASX: NHF). NIB has enjoyed a share price gain of close to 10% and thereby outperformed Medibank by over 20%.
While some investors may be alarmed by the reduction in size of their profit on paper, arguably the share price weakness is an opportunity for investors looking to own a blue-chip and defensive business to consider buying in or adding to their existing holding of Medibank.
Here are two reasons to put the stock near the top of your watchlist:
Market Leader: Of the total Australian private health insurance (PHI) market, Medibank had a 29.1% share (as at 30 June 2014); not far behind was Bupa with a 26.7% share; while in third place was the much smaller HCF with a 10.8% share.
Being the biggest doesn't automatically correspond with being the best of course a review of key metrics such as operating profit margins across the PHI industry reveals that Medibank has a lot of work to do before it is the leader in this regard.
This negative, can actually be turned into a positive for investors. Firstly, it shows that there is room for improvement which could lead to further earnings growth; secondly, its market size should provide Medibank with certain advantages such as enhanced bargaining power with suppliers that – as we will see in the next point – are central to the group's strategic plans.
Strategy: Management has stated that its strategy for positioning Medibank for profit growth involves moving from a health insurance focus to a health assurance focus. The key here is that this strategy will see Medibank play across the entire value chain with the "ability to influence different parts of the care chain to meet the needs of their customers". This is an important change in the business model for the company and cost savings could be realised if it can negotiate improved terms with hospitals and primary health care providers which together account for close to 80% of PHI expenditure.
