Seven months after investors scrambled for a piece of Medibank Private, the health insurer’s share price has come back to earth as concern grows about its outlook.
Having hit a high of $2.59 in February, Medibank shares have been in retreat for the past three months and are currently trading around $2.06 per share.
That’s still slightly ahead of the $2 per share retail investors paid in the company’s initial public offering though those who bought in soon after its listing are currently underwater, as are the institutional investors who paid $2.15 per share in the float.
Fat Prophets chief executive Angus Geddes said the market appeared to have soured on the company’s short term prospects due to concerns tough competition among health insurers was hurting profit margins.
“What’s happened is that the market is getting a little bit concerned about the growth prospects for the company and concerned also about a bit of margin pressure that’s coming through,” he said.
“The feeling I’m getting is that the numbers aren’t going to be quite as good as what everyone thought five or six months ago.”
At the time of the float, analysts were talking up the prospect of stronger profit margins from Medibank as the transition from government owned enterprise to a public company allowed it to strip out costs and become more efficient.
But Mr Geddes said there were doubts about the ability of long-standing chief executive George Savvides to carry out the necessary cost cutting and lift the business’s performance.
He said Mr Savvides would need to deliver a solid full year result to fend off doubters.
“Over the next six months, if the company misses the prospectus forecasts by a significant margin I’d probably be advocating for a change in management,” he said.
“He’s been there for 13 years and I just think you’ve got to keep things fresh – you need new blood.”
But Mr Geddes said the company was likely to be a good investment over the longer term.
“If you take a medium to longer term view we will probably look back and see this as a bit of a blip,” he said.
“They’ve got a great brand, they are well positioned, medical insurance is defensive – people have to have it and I think the stock looks pretty attractive at these levels.”
Medibank in February said it was on track to achieve its $250 million prospectus profit target for 2014/15.
OptionsXpress market analyst Ben Le Brun said Medibank’s share price was unlikely to fall substantially from here and would likely be very attractive to buyers under $2 per share.
“I would anticipate some support from the market very very soon, if it finds itself at a price below $2 I think institutions and retail investors would support the stock,” he said.
“I would expect its going to plod along and be a reasonable investment case.”