Mum and dad shareholders are got increasingly nervous on Monday as the share price of Medibank Private Ltd (ASX: MPL) retreated ever-closer to the $2.00 per share retail IPO price. The company's share price fell another 1.8% to $2.08 to take the five-day fall to 4.6% and three-month plunge to nearly 19%, versus a 3.25% fall in the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO).
'BUY' Price
The average buy price of Australian analysts covering the company is $2.25, some 8% above the current level, implying some level of upside for investors at current levels, however that number doesn't tell the whole story. Based on different assumptions of market and company growth, analysts have ascribed a value of between $2 and $2.40 on the company, a massive 20% difference.
The average analyst estimate for Earnings Per Share (EPS) for this financial year is 9.7 cents and Dividend Per Share (EPS) is 4.9 cents. These numbers rise to 10.9 and 8.2 cents per share for the year ending June 30 2016, implying a price to earnings ratio of 19.8 and dividend yield of 3.8%.
The BIG Problem
The problem for Medibank is the hype around the company and the promise of huge efficiency savings as a result of being released from the red-tape associated with being a government-owned department.
The analysts at UBS acknowledge the risk of this potential being over-hyped and rate the company a SELL because they see major risks in Medibank's high-cost business model. The group did note that claims growth moderated and margins stabilised in the most recent quarterly statistics, however they see Medibank's customer lapse rate as a serious concern.
The team at Morningstar also noted following the first half result that "…softer than expected premium revenue growth is concerning and is likely to continue as policyholders downgrade product features and or increase churn rates."
Inflation a Concern
While not unique to Medibank, this year's round of premium increases have really hit home for every-day Australians. My premiums with competitor BUPA surged to over $115 per month as the 34 health insurers operating across Australia were granted an average premium increase of 6.18% effective April 1.
Medibank was granted an even higher 6.59% at a time when wage growth and inflation is struggling to rise above 2.4%. This is making health insurance more difficult to maintain and will FORCE consumers to move to lower-cost brands. This is evidenced by Medibank's core brand lagging behind the industry growth rate by around 3%, while the low-cost AHM brand saw policyholder numbers increase by 20% over the 12 months to December 2014.
It's all about value
As my colleague Ryan Newman pointed out yesterday, investors are spoilt for choice when it comes to low-growth medium-income Australian stocks. Its demanding valuation places it against the big four banks, Telstra Corporation Ltd (ASX: TLS), QBE Insurance Group Ltd (ASX: QBE), Insurance Australia Group Ltd (ASX: IAG) and even BHP Billiton Limited (ASX: BHP). All of these companies offer arguably better value than Medibank, even if the share price fell another 10% tomorrow.
