Medibank Private - Ticks all the boxes of the Investment checklist
As per my last note to clients (last Tue 21st Oct 2014), I think the Medibank opportunity should definitely be taken up. So far, the demand is ridiculous so please take some time to read what I've written below.
We had our Shaw Australian Equity Strategy meeting last Thursday and Equities are looking like the best investment for the next 12 -24 months. Interest rates' aren't moving up domestically, the US economy is improving, the EU should announce another stimulus next year. Comparing other asset classes to shares offering attractive dividend yields of 5 - 5.5% and fully franked (is 7.2 -7.85% grossed up) proves very attractive. Going forward, earnings growth is moving up which means company profits are starting to pick up….and what we're seeing now are fund managers starting to pay up for growth.
Following on this - Medibank to us perfectly satisfies the investment checklist from a macro and micro view:
1.) Industry (healthcare) spending going up? YES
2.) There are more people growing older…YES
3.) Competitive dividend and franking…YES
4.) Biggest player? YES
5.) Scale? YES
6.) Low margins = strong potential upside..YES
The key to the company’s success is management’s ability to drive profit toward industry best practice, in line with the company’s scale as the number one player in the space. Hopefully the medium term profit upside is not capitalised before listing.
§ Industry growth is good: healthcare expenditure has been growing at 7.9% for the last decade, 1.2x nominal GDP. An ageing population, people living longer and increased wealth means more money spent on healthcare.
§ Government policy to promote private healthcare; both private hospitals and private insurance. At 30 June 2014, 47.2% of the population has private health insurance. This is encouraged due to the Medicare Levy Surcharge of 1.0%-1.5% on individual incomes over $90,000, and $180,000 for families.
§ MPL largest player with 29.5% market share: Bupa has 26.8% market share, followed by HCF at 10.8%, NIB at 7.7%. The top four players hold c75% market share.
§ MPL’s operating margins are not reflective of its size. Bupa has margins c50% higher than MPL. NIB - a significantly smaller player than MPL - has margins c20% higher than MPL. This is the upside if management execute properly with the move to private ownership.
§ The company is debt free and capital is sound; listing may provide opportunities to acquire other smaller firms.
Given the attractive Investment thesis and demand for the float - I think Medibank will perform very well on float day. The demand here at Shaw's is the strongest I've seen since Telstra 1. There's no way the government can be seen shafting the public, I think they will make a good go of this.
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