Medibank Private a solid business


This week Money asks Skaffold for a hot stock pick - Medibank Private (ASX:MPL)

Key statistics:

24/11/15 closing share price: $2.300 52 week high: $2.590 Most recent dividend: 5.3c Annual dividend yield: 2.27% Franking: 100%


If you bought into the Medibank Private IPO, then you've been on quite a ride. Why the share price has fluctuated between $2.00 to just under $2.50 is anyone's guess. The company has released good (it's on track to deliver its FY15 prospectus earnings forecast) and also unexpected news (managing director George Savvides will retire 15 months earlier than initially planned). The thing to remember is that, fundamentally, Medibank is a solid business with a very low risk balance sheet, strong profitability and good cash flows.

Just less than 50% of Australians have private health insurance. Of that market Medibank Private services 17%, or 3.9 million Australians. In a market that generates revenue of $23 billion a year, and which is forecast to grow at around 6.5% a year, Medibank has a pretty nice slice of the pie. In fact it is the largest private health insurer in the country.

Despite being listed for just 12 months, Medibank has been around since 1976. And what a solid business it has been. Historically MPL's earnings have grown at 20% a year, and it has generated an average return on equity of 15%.

Looking to the future, earnings are forecast to continue rising and return on equity is forecast to rise to over 20%. At Skaffold we focus on companies producing a return on their equity of more than 10% - Medibank certainly ticks the box for strong profitability.

Skaffold stock research software crunches every ASX-listed company's fundamentals - historical and forecast - through a series of patent-pending algorithms to derive an intrinsic value. By 'intrinsic value' we mean 'true' value - the sum total of a business's worth based on its earnings, dividends, equity and debt. For investors, knowing what a stock is worth is like striking gold. When you know what a stock is worth, you can make an educated judgement on what price you should pay for its shares. Remember, the aim of the game is to buy shares for bargain prices - less than what the business is worth.

Today Skaffold estimates Medibank's business is valued at $1.87 per share, compared to a share price of around $2.30. Over the next two years Skaffold forecasts MPL's intrinsic value will rise by 11%pa, to $2.32. A share price correction back to around $1.90 would represent a good price to buy into this top-notch business.


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