Medibank Private Health Insurance

Medibank has been put up for sale by the Australian government. 

Medibank is Australia's largest private health insurer by Premium Revenue, however it has the second highest Management Expense Ratio (MER) just behind HBF (source: Morningstar). The prospectus has not been published however in my opinion some of the salient points are: 

• Potentially massive opportunity for cost-cutting in the hands of private operators
• Private health insurance is a growing and stable market
• Potential for the IPO pricing to be very reasonable

We need to wait and see what is contained in the prospectus before worrying about things too much. The main purpose of this post is to flag with interested eligible readers to pre-register their interest at the following address: 

https://www.medibankprivateshareoffer.com.au

Pre-registration closes 15 October. 

I will write some follow-up analysis when the prospectus is released. 

As an aside... 

Perhaps this is wishful thinking, but it could be a superb catalyst to help draw retail investors back to the share market. Previous floats such as Telstra and Commonwealth Bank created an army of share investors and it was a great shame to see so many people burned through the GFC process. The government gives out hand outs to entice people into the property market, so why not do the same for share investors. Handing Medibank out at a big fat discount would do the job! 

Kristian

Disclosure: no position in Medibank (but hold a policy)

VIX revisited

I did a very quick post back in June noting the very low VIX level. Since then, VIX has remained very compressed and at very low levels: 

That chart (source: Yahoo Finance) goes back to 1990 and shows that current VIX levels are bouncing along at all time lows. VIX is seen by many as the canary in the coal mine: low VIX = low volatility = high investor complacency = time to be really scared. This has plenty of people worried, including famed deep value investor Seth Klarman who in a recent letter noted the 'bubble in complacency' and cited worrying tell-tale signs of investor behaviour. 

The last time when VIX was ultra cheap for a sustained period was 2004 to early 2007 during the great stock market boom. Shortly after VIX started moving high in lock-step with the stock market wobbling then crashing. The low VIX period before that was roughly 1992 to the early 1996. VIX then moved aggressively higher, so you would guess that the stock market tanked, right? Let's take November 1995 as a data point: VIX 12, S&P500 630. Fastforward to November 1999: VIX has through some savage peaks and troughs moved to 25 and S&P500 has actually moved up to 1400. 

That's almost a two and a half-fold increase in the market (excluding dividends) during a period of rapidly increasing volatility. And that's even after the S&P500 had already risen substantially. 

These are only a few points in history, so it's difficult to make assumptions. I don't work at Renaissance after all. I do however think it's fair to say that low volatility does not automatically mean tough times ahead. Interesting, anyway.    

Kristian 

Boom Logistics (BOL)

Just a short note to say well done to Iona Mcpherson, the outgoing CFO at BOL. Incredibly tough job in an industry experiencing a cyclical down-turn. 

Kristian 

Disclosure: own BOL

RNY Property Trust (RNY): Scuttlebutt Edition

Acknowledgement: this trade idea was presented to me by various colleagues, and is very well documented by Forager Funds. I've honestly no idea who came up with this idea first - however for ethical purposes I want to disclose it is not my original idea. It does however fit my cigar-butt style, and therefore I am an owner of the stock. 

With a stock price of ~28c and NTA of AUD 51c (30 June) the discount-to-value is straightforward to see. There are however issues namely a flat suburban commercial office market in the US, no distributions (and none likely until 2016), restrictive debt covenants and CAPEX requirements  to reduce the vacancy rate. Some of my colleagues think it is a value-trap, and they are potentially correct. I have been a buyer given the big discount, and expecting the discount should close when conditions improve at the fund and a way to get some USD exposure.

I visited RNY following a visit management (RXR Realty) in Long Island November last year, and I also just visited New York / Long Island - not to meet management but to snoop around a bit more to get some scuttlebutt.

Here is some of the information I found:

As background, RNY owns commercial office properties in the suburban markets of Long Island, Connecticut, New Jersey and Westchester. The problem with this geographical spread is that it is still dormant despite inner New York such as Manhattan and Brooklyn performing well (both residential and commercial). The ripple effect for commercial offie hasn't spread out to the suburbs. This appears to be the case across the US, as it appears to be for Australia (I suspect true of many countries).

On the flip side, minimal new supply is coming on-line and developers simply don't build commercial property without securing committed sales or leases. Incentives are still aggressive - even up to 1 year in the case of 5-6 year leases. The consistent message was the commercial suburban leasing market is recovering, but ever so slowly. You're not going to make a ton of money quickly from RNY in the short term due to an influx of new tenants to soak up vacant stock.

RXR have a great reputation on Long Island according to the people I spoke to (who have been dealing with RXR for years). My own observation is that while they appear to be good operators, they have bigger fish to fry (Manhattan) for the time being and RNY is not a high priority until vacancies drastically reduce and/or the re-financing is complete (long story: debt covenants restrict distributions and spending on CAPEX which in-turn is holding back attracting good tenants - a catch 22 that is not easily solved in the short term).

The average cap rate across the RNY portfolio is 8%, however anecdotally I heard that cap rates are starting to compress to less than 8%, although I did not receive firm data to back this view up.

In summary, I didn't find information that was in conflict with RXRs position. This situation could take a while (18 months) to work out, however the share price allows for that. If we do happen to get a strengthening USD and/or improved property prices then the upside is even bigger (or reverse).

Kristian 

Disclosure: own RNY