Management must now deliver as Medibank puts on the ritz

MEDIBANK closed down one cent yesterday, but at a 64 per cent premium to the market and it is frankly not worth the price.

MEDIBANK closed down 1c yesterday but at a 64 per cent premium to the market, the general insurance duopoly and a 20 per cent premium to rival health fund NIB — and it is frankly not worth the price.

This is not to say it won’t continue trading at these full-valued levels, just that the valuations at 23 times forecast earnings are ritzy at best and Medibank’s George Savvides must be secretly bemoaning the almost flawless execution of the float process.

Senator Mathias Cormann’s team helped by Lazard and the float brokers Macquarie, Deutsche and Goldman didn’t put a foot wrong, but now all the onus is on management to deliver.

A massive 586 million shares changed hands yesterday — or 21 per cent of the float — which is four times the first-day trade in Telstra in 1997. The stock spent most of the day around $2.20, a lofty multiple of 24 times, before some sense prevailed.

The hefty multiples are due in part to a household brand with market-leading (albeit slipping) market share, a GDP-plus health industry glow for what is essentially an insurance company and a well-managed demand potential for the stock.

There is clear upside on margins given industry leader Bupa two years ago was operating with an expenses ratio of 8.5 per cent and a 6.6 per cent margin. Savvides is tipping an improved margin from 4.4 per cent to 4.9 per cent and an expenses ratio falling from 9.2 per cent to 8.7 per cent.

This year’s profit is already in the bag and there is upside all around, with generous provisions and some rarely noted upside in the prospectus — which confided there were assets in the complementary services division that were not delivering and seemingly soon to be shelved or sold.

Savvides acknowledges the challenges and will be relying on the likes of Andrew Wilson, a relatively new recruit from the McKesson acquisition, to keep cutting out costs.

Medibank wants to join Telstra et al in managing health better so people use hospitals less and for the right treatment.

Some high-profile, value fund managers got zero allocation in the float, thinking it was worth no more than $2.10 a share. Given the stock now has an index weighting of about 0.4 per cent of the ASX 100 index, that is a gutsy call.

If the Medibank stock price continues to rise, these managers will have some performance questions to ask, but right now their value metrics are well grounded.

The only listed rival, NIB, is selling at 19 times forecast earnings, general insurers IAG and Suncorp are selling at around market multiples of 14 times and the hospitals such as Ramsay and Healthscope are selling at more like 26 times.

Medibank will soon be regulated by the Australian Prudential Regulation Authority as an insurance stock, with the Private Health Insurance Administration Council’s days numbered.

Logic says health premiums should be deregulated, which as often as not means the price rises — which arguably would suit Savvides. He has already made clear he will be seeking a 6.5 per cent premium next year, which will no doubt be awarded.

The government should have deregulated premiums before the float and, having not done so, one presumes it won’t do anything in the foreseeable future.

The prices may rise under deregulation but it is more uncertainty — especially as Medibank’s market share has slipped a touch but still stands at an impressive 26 per cent.

Savvides has a relatively new management team and the pressure is on to deliver, which means execution somewhere near as flawless as the float process.

Please explain

THE Discovery/Foxtel interest in the Ten Network is by now widely admitted and indeed communicated to the Australian Competition & Consumer Commission, yet still not a word on the regulator’s website as an active merger under consideration.

Formal notification is in such circumstances normally the responsibility of the bidding party and it would seem high time that some clarity be given to what is no longer a market secret.

Toll rings the bell

TOLL boss Brian Kruger is clearing the decks for an imminent acquisition to boost the company’s tepid growth outlook.

The company is of course staying miles away from the mere idea of an acquisition and agreeing with analysts that this is all boosting returns on capital (which it is). But there is nothing wrong with getting dressed up nicely before stepping into the ball.

The Toll board met yesterday.

The asset sales, which include a bunch of Paul Little-inspired Asian assets including Marine Logistics Asia and Global Express Asia, are said to generate about $100 million in cash plus upwards of $350m for the land in Singapore that houses its offshore petroleum services operation.

Deutsche Bank analyst Cameron McDonald said in a note that the sales would reduce capital employed by 1.6 per cent, which would help boost returns above the forecast 8.7 per cent this year. Kruger has said he is targeting 10 per cent-plus returns on capital.

While playing down talk of a deal, Kruger is actively looking for one to boost the company’s growth profile in a continued weak Australian economy.

UBS is forecasting earnings per share of 42c this year, up 1c, growing to just 44c in 2016.

Harvey’s head scratcher

GERRY Harvey had them scratching their heads yesterday but on any reading his aggressive form of equity-funded special dividend should have the stock price up, not down — as it was in the early afternoon trade.

Indeed some suggest, tax office willing, more companies will target this form of franking distribution from smaller, debt-ladened companies.

Harvey Norman has a little bit more than one billion shares on issue and $659m in unused franking credits, which Harvey wants to distribute to shareholders.

Most companies would fund a special dividend with either a dividend reinvestment underwrite or with debt.

Harvey paid Pattersons $55,000 to underwrite his equity issue and agreed to sub-underwrite the heavily discounted issue at $2.50 a share against the opening price for the stock of $3.71 a share.

While the company’s faithful were at the Sheraton on the Park for the annual meeting, the stock went on a wild ride — down 5 per cent on a cleaning statement then up on the entitlement issue news then back down again.

Effectively, shareholders pay 11c a share for the entitlement issue (one for 22) and receive 14c a share back plus 6c a share in franking credits.

On any maths that’s a buy, but such is the confusion over the plans that the stock was selling down.

It is unorthodox — but there is nothing wrong with the scheme.