Mum and dad investors can make a bid for shares in the float of Medibank Private. But before investing in the health insurer's initial public offering, Fairfax Media has identified 10 pros and cons for shareholders to consider.
More than 750,000 Australians registered their interest in the sale of the government-owned insurer. Some firms like CommSec have already closed their 'broker firm' offers, suggesting strong interest in the privatisation.
Retail shareholders have three weeks to place their bids for a dollar amount of a parcel of shares. Those shares could be priced anywhere between $1.55 and $2.00. The final price will be outlined following an institutional bookbuild in mid November, before the Medibank float on November 25.
FIVE REASONS FOR BUYING
1. Privatisation dividend
After 38 years under government ownership there should be plenty of fat to cut from Medibank's costs. Demanding private owners should drive greater commercial discipline, which should boost earnings, even when revenue growth is weak. This is widely dubbed the 'privatisation dividend' and has been a feature of recent sales of government assets like the $4.6 billion float of rail freight business QR National, now known as Aurizon, in 2010. Medibank has already made some progress reducing its management expense ratio to be in line with the industry average, but it still lags its nearest rival Bupa and listed competitor nib. Some investors say this shows there is improvement to come.
2. Growth in healthcare sector
Expenditure on healthcare is on the rise, driven by a growing, ageing population who are wealthier than ever before. Outside of these factors demand for medical care is also rising due to improved technology, and increased prevalence of chronic disease. Annual healthcare expenditure per Australian grew at an annual rate of 6.2 per cent in the decade to 2013 to $6,400.
3. Increasing reliance on private healthcare
The above demographic trends present a quandary for government – how to ensure the health of Australians, while limiting the exposure of the public purse to ballooning healthcare costs? One answer is to encourage greater use of private health cover and governments have a number of levers, like subsidies, to do that. The Coalition says it is a supporter of private health cover and is considering ways the sector can play a greater role in healthcare.
4. Scale
Medibank is the market leader with a 29.5 per cent share of the $19 billion private health industry. The insurer's managing director George Savvides has said Medibank wants use its scale – or to "flex its muscle" – to change the way it contracts with private hospitals. Medibank wants to reduce the amount it pays out for medical care of its members and it is asking private hospitals to link payments to quality measures. Its scale gives it a powerful position in these negotiations.
5. Growth of ahm
Medibank bought Wollongong-based insurer ahm in 2009 and re-established it as an 'essentials' health fund. The budget brand is distributed through cheaper channels, like online comparison websites and a call centre, than Medibank's expensive retail storefronts. But unlike other small insurers, ahm can tap into the scale of the larger Medibank to keep its back-end costs low. It is growing quickly and is one of the reasons Medibank has been able to maintain its market share. The number of ahm policies rose from 175,000 in 2012 to 226,000 in 2014. Mr Savvides has said ahm is "the fastest growing health brand in the top 20 insurers."
FIVE REASONS AGAINST BUYING
6. Core brand struggling
The strong growth in ahm is in contrast to the core Medibank brand, which has struggled to grow its customer base amid increasing competition. Some investors worry the growth of ahm will push down Medibank's profitability, because policies with higher values can deliver better margins. The number of Medibank branded policies has remained stable at 1.6 million in the past three years. The overall company has been growing slower than the broader industry for the past five years too, as this graph shows.
7. Churn increasing, industry-wide
The comparison websites like iSelect, HelpMeChoose and the government's privatehealth.gov.au encourage policyholders to keep an eye on how competitive their provider is and switch if they can get a better deal elsewhere. These aggregators, apart from the government website of course, earn money from health funds each time they deliver a new member. So they have an incentive to encourage churn. But for the providers like Medibank it is more expensive to acquire new customers than it is to keep the current ones. This can diminish earnings.
8. Can Medibank deliver?
Cutting management costs, as well as reducing medical claims are two initiatives that Medibank can fall back on to increase earnings in the event it can't sufficiently grow its topline revenue. But can the company deliver? Some investors have asked why Mr Savvides, who has run the business for 13 years, hasn't made more progress on these initiatives to date. As one letter writer to The Australian Financial Review says: "It is reported that, once the company is privatised, chief executive Mr Savvides will run a tight ship. This implies that he has not been doing so in the past."
9. Regulation risk
At the launch of the prospectus Senator Matthias Cormann, the Finance Minister sought to allay investors' concerns that changes to regulation could hurt Medibank's prospects. Senator Cormann said the Coalition was not considering any detrimental changes, and reiterated the government's stance that it would repeal means testing of the private health insurance rebate when it was fiscally appropriate to do so. But, as is the way with governments, Senator Cormann cannot vouch for how future leaders will treat the sector. It is possible that subsidies could be scrapped if they are seen as too big of a burden.
10. IT project risk
Medibank is part-way through a $150 million investment in its technology systems. The overhaul of its claims and customer management systems will give it a better foundation from which to interrogate where it is spending money. This is important work, but is also a risk as the prospectus outlines. If the project runs over, it will drive up the cost. As Financial Review Chanticleer columnist Tony Boyd has pointed out the two technology suppliers are IBM Australia and SAP. "IBM has had a horror several years in Australia with two highly notable IT blow-ups including Queensland Health and Energy Australia," Boyd wrote.
