Some investors buoyed by Medibank float

Both the federal government and small investors have benefited from the successful management of the privatisation of Medibank Private. Small investors were able to sell their $2 cost price shares for a quick profit of between 5 and 10 percent on listing. Institutional investors paying $2.15 a share in the book-build have been disappointed that the shares are now trading below this level but it was inevitable that many smaller investors would opt to take a quick profit.

The very strong demand from individual investors reduced the number of shares available to larger investors and it may yet be some time before institutional demand for the shares is met. Share price movements from now on will depend on how many small investors decide to hold on to their shares for the longer term. The exemption of 50 percent of realised gains from income tax when investments are owned for longer than 12 months is one reason for holding on. Similarly, the low interest rates on term deposits increase the attractions of owning Medibank shares in order to receive the fully franked dividends.

The unknown factor is if the privitisation will lead to higher profitability through greater efficiency or via gearing up of operations. Even if profitability does increase, institutional investors who bid the final float price up to $2.15 a share may have already assumed this will happen. As a result, investors who hold on for the longer term will need to keep an eye on trends in profitability as well as changes in government health insurance policy.

The price private health insurers charge customers is closely regulated, with approval required for all premium increases. Health funds cannot charge different premiums to customers based on their claims on their policies, resulting in cross subsidies between members in the same fund. This is a reason for investors to be cautious now the government has no stake in the industry.

Institutional demand for Medibank shares has and will continue to be boosted by the fact that Medibank will, because of its size, be included in the key share indexes. All passive investors who allocate their portfolios on the basis of index weightings will be required to buy Medibank shares in coming months.

The Medibank share price will fluctuate in line with general market movements. But with banking and major mining shares making up a large proportion of listed shares, institutional investors could be attracted to the relative security of Medibank in any downturn.

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Daryl Dixon

Executive Chairman

Daryl Dixon is one of Australia’s foremost investment experts and a well known writer and consultant. He has provided trusted advice to thousands of personal clients over more than 25 years and is an acknowledged expert in the areas of tax, superannuation (including public sector superannuation), social security and investments.

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