Government hopes to raise $5.5b from Medibank sale

The Federal Government has put a $1.55 to $2 per share price range on its Medibank Private float.

While the shares may end up being priced below or above the indicative range depending on demand, Finance Minister Mathias Cormann also announced a $2 price cap for retail investors buying up to $250,000 worth of shares.

At the top end of the indicative price range, the Government would raise a total of $5.5 billion from the sale, while the bottom end would value Medibank Private around $4.3 billion.

The prospectus released today forecasts that Medibank Private's statutory net profit after tax will fall 2.9 per cent in the current financial year to $250.9 million, with pro forma profit down 0.1 per cent to $258.2 million.

A key contributor to the decline is the loss of an immigration contract, which was put out to competitive tender and which Medibank Private failed to win.

On the pro forma profit forecast, Medibank Private shares are being priced between 16.5 and 21.3 times current earnings.

The company is expecting to pay out 4.9 cents in its first dividend payment to shareholders for the seven months to June 30, 2015, which would be a yield of 4.2-5.4 per cent, based on the indicative share price range.

Given the company's proposed policy of a 70 to 80 per cent payout, it says a normalised dividend yield - which takes account of the fact that the company normally has higher earnings in the second half of the financial year - is likely to sit at a lower 3.5 to 4.5 per cent.

'Attractive' at $1.55, 'not terrible' at $2

The managing partner of investment firm 100 Doors, Peter Esho, says the share price range is very wide, meaning how good a deal investors get will depend whether final pricing is near the top or bottom of the range.

"We'll only be bidding with a long-term horizon, we won't be chasing any short-term profits, and we hope that we're filled at an attractive price, which is at the lower end of that indicative range," he told ABC News Online.

However, Mr Esho says even the $2 top end of the range is not beyond reason.

"It's not a terrible deal for the investor that has a very well diversified portfolio, is looking at it as a long-term investment and is not necessarily chasing a quick buck once it hits the market," he said.

"Good quality businesses do come at a price, and if it is priced at the top of the range it'll be because demand is so strong and that should flow through into the secondary market."

It is a view backed by Steve Johnson, the chief investment officer at funds manager Forager, even though he is generally wary of buying into floats.

Mr Johnson says the Government has a strong electoral incentive not to rip voters off, and Medibank should be able to cut costs to boost its profitability.

"It is the larges player in the market with 30 per cent market share and the forecast is for 4.9 per cent operating margins," he told ABC TV's The Business.

"Bupa, the second largest, generates margins north of 7 per cent. I would expect over time Medibank can get close to Bupa."

However, he also cautions that the highly profitable industry is ripe for more competitive pressures that could put downward pressure on premiums and profitability.

Government cashes out with special dividend

The Federal Government is also getting one last financial bonus from the company, taking a special dividend of $198.8 million from the company before it is sold off.

The special dividend includes $58.8 million from earnings from the five months before the sell-off, but also $138 million out of the company's retained earnings.

The Government has previously revealed that more than 750,000 Australians have pre-registered to receive the Medibank Private prospectus, also entitling them to get a larger allocation of shares than those who did not pre-register.

Medibank Private policyholders are also entitled to a greater allocation than the general public.

The retail offer opens next Tuesday and will close on Friday, November 14, with the company to list on the ASX around November 25 and begin normal trading in early December.