Lonsec Stockbroking has released a research report on Medibank Private Limited (MPL) delivering a subscribe recommendation to advisors and investors for Australia’s largest privatisation since Telstra.

Lonsec says it expects Medibank to generate 6% p.a. compounded earnings growth over FY15-17 and offer a yield of around 4.0% fully franked.

It also provides FY16 valuation target of $2.33/share – representing a 16-50% premium to the proposed price range.

“The initial public offering of MPL offers investors exposure to a market leading private insurance business with a strong balance sheet, solid brand, moderate growth potential and favourable macroeconomic and industry dynamics,” the report states.

MPL is Australia’s largest private health insurer, with 3.8m members and a 29.1% market share. Its core business is the underwriting and distribution of private health insurance (PHI) products (i.e. Hospital and Extra’s cover) through its two brands, Medibank and ahm. Upon listing, it will rank within the ASX100.

Based on its estimates, Lonsec expects Medibank to deliver investors:

Three year EPS and DPS growth of 6% compounded annually

A fully franked dividend FY16 of 3.9-5.1%

Above average return on equity of approx 18%

In Lonsec’s opinion, the biggest risk to the business is any adverse change to government and regulatory policies and volatility in investment income.

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