AS widely expected Medibank Private shares soared when they hit the market today, reaching $2.22 within seconds – an 11 per cent premium for mum-and-dad investors – before closing at $2.14.
The hugely popular $5.7 billion dollar float delivered a 7 per cent-on paper profit at close for retail investors, but the outlook was less positive for institutions which made a slight loss.
Retail investors bought the stock for $2 each, a discount to the $2.15 offered to institutions,
in what is the biggest privatisation since Telstra under the Howard Government.
While it was a strong debut, it was below expectation with most brokers tipping the stock to close above $2.30.
As 60 per cent of shares in the nation’s largest private health insurer is allocated to retail investors, institutions increased their stakes with heavy buying pushing the shares to a high of $2.23. Over 100 million shares changed hands in the first half-hour of trade.
Meanwhile, the insurer has raised more than $1 billion more than the Abbott Government had first predicted.
All the money will be going into the Coalition’s so-called asset recycling fund. The fund helps pay for incentives for states and territories to sell assets and use the proceeds to build new infrastructure, such as roads.
Treasurer Joe Hockey said 400,000 Australians have become direct shareholders in Medibank Private, while millions more would have invested through their superannuation.
“They received on the list price ($2.22) a 10 per cent benefit for backing Medibank Private,” Hockey told parliament.
“That is a reward for their enterprise investing in the public offer.”
The Government said earlier this week that scoping studies for other potential privatisations — including Australian Hearing, Defence Housing Australia, the Royal Australian Mint and the Australian Securities and Investments Commission’s Registry Services business — have not yet been completed.
The market closed lower. At the bell, the ASX200 was 27.0 points, or 0.5 per cent, lower at 5,334.8, while the All Ordinaries was down 28.1 points. or 0.53 per cent.
WHAT TO DO NOW WITH MEDIBANK SHARES?
Financial commentator David Koch says when the dust settles, Medibank shares will be judged the same as every other stock on the ASX; on business fundamentals.
“Depending who you talk to, the current price isn’t supported by those fundamentals,” Koch said.
“One of the most common ways to assess a share’s value is to look at its price earnings ratio (PE) compared to industry peers. This measures how much investors are paying for each dollar of annual profits; effectively, a measure how expensive a company’s shares are.
“At the institutional price of $2.15, Medibank is trading on a forward PE ratio of about 23 times forecast profit for 2015-16.”
He said compared with the only other ASX listed health insurer NIB, which is trading on a PE of roughly 18 times projected FY16 earnings, Medibank starts to look expensive.
“That means investors are counting on Medibank management growing earnings at a better rate than NIB to justify the price. If investors don’t see this happen in the first year or so, they’ll be quick to punish the stock.”
But he said rather than speculate as to whether this can be achieved, it’s a good idea to hear what the professionals are recommending we do.
“The tricky thing about a float this big is that most banks and advisory firms have fingers in the pie, so their recommendations have to be taken with a grain of salt,” Koch said.