All eyes on Medibank shares amid high demand from institutional investors

MEDIBANK Private will be on everyone’s watch list when it lists at midday.

MEDIBANK Private will be on everyone’s watch list when it lists at midday and, given indications of strong institutional demand in the initial public offer, a period of overvaluation may occur before it is incorporated in the S&P Dow Jones indices.

If the market talk is correct, there could be a great deal more institutional money looking to buy the stock on market, and that could help generate a “stag” profit for retail investors who paid $2 a share in the initial public offer.

On some estimates, Medibank Private could trade to $2.30 or $2.40 a share, but at those prices it would seem overvalued and high enough for retail investors to consider cashing in for a 15-20 per cent profit.

Based on the “grey market” provided by IG, the stock will close the day at $2.28. The grey market recently was a fairly accurate guide to the institutional bookbuild price of $2.15.

“It seems that $2.40 could even be seen tomorrow (Tuesday) because the institutional allocation is fairly low,” said IG chief market strategist Chris Weston. “Naturally not everyone will be looking to stag the open, but it seems likely that the stock will open around the $2.30 level in my opinion.”

Based on Medibank’s prospectus earnings estimates for fiscal 2015, the final price of $2.15 puts the stock on a forward price-to earnings ratio of 22.9 times. At $2.30 it would be trading on 24.5 times, and at $2.40 it would be trading at 25.5 times. Given that Australia’s only other listed health insurer, NIB Holdings, trades on 19.3 times forward EPS, Medibank’s valuation would be quite full in the $2.30-$2.40 range.

While the degree of institutional oversubscription wasn’t disclosed, there was obviously strong demand as the final price rose to $2.15 versus the indicative IPO price range of $1.55-$2.

Index funds that missed out in the IPO won’t have a problem paying a bit more for Medibank Private on the market, as their priority will achieve an index-weight holding of the stock. However, they could have a few months to get set.

While Medibank’s implied market capitalisation of $5.68 billion means it’s likely to be included in the S&P/ASX 50, 100 and 200 indexes, it’s not significant enough to warrant automatic inclusion.

And to achieve index inclusion, a company normally has to demonstrate sufficient liquidity in its shares over a two-month period, so on that basis Medibank will probably be included in the March rebalance.

Retail investors who didn’t get as much Medibank Private stock as they hoped in the broker firm offer may use any weakness to add to their holdings. Their final allocation will be close to 7 per cent of what they bid for, although there was an element of overbidding in anticipation of scale backs.

“It’s a good stock with defensive qualities, but in my mind around about $2.20 is as far as I want to go,” said Patersons senior private client adviser Peter Morgan. “That’s not to say it’s not worth more and it won’t trade higher. It’s just that at that stage the valuation is enough.”

“What we’re saying is, you can buy and ANZ bank on under 12 times forward earnings or a Woolworths under 15 times at the moment. It’s a beauty contest.”