ASX code: CVO
Share price: $1.40
Industry: Insurance
Forecast FY2016 Dividend: 5.5c
Cover-More (CVO) is a specialist integrated travel insurance, medical assistance and employee assistance provider.
The business operates a capital light business model as it doesn’t take on the underwriting risk of the policies sold, has a dominate market share of ~40% in Australia with a competitive advantage of operating a medical assistance program (providing policy holders with additional comfort) and has developed a leading edge technology platform (IMPULSE) utilising “big data” for price optimisation.
Further to this, CVO is also exposed to an industry experiencing reasonable growth in the context of a low growth environment with a geographic focus on Australia, US and India each growing at ~3-4%, 6-8% and 10%+ respectively.
The stock sold off this year because of the uncertainty surrounding the sustainability of the businesses operating margins and management’s ability to transition from its current sole underwriter to a panel of underwriters, a key initiative of the group, on the same or more profitable terms. In contrast we think this transition will be possible and expect the near term catalyst for the stock will be the signing of a new underwriting agreement with multiple insurers, providing the market certainty on the business model. Management will then be better-placed to pursue cost efficiencies by aligning the product suite with industry lines, and to develop new products (currently held back by existing insurer).
Last week, CVO entered into a trading halt pending the successful raising of $73.3m in equity to facilitate the acquisition of Travelex Insurance Services (TIS), the third-largest retail travel insurance specialist in the US, for $138m. The acquisition is an excellent strategic fit for CVO to gain a foothold in the US market and develop a genuine global platform. Integration of the two businesses models synergies including the sale of more policies through TIS’s existing distribution network of 3,400 sales agents, and cost savings from concentrating medical assistance in three global hubs.
As part of the capital raising, Management also confirmed the business was operating in-line with market expectations (albeit only 2 months trading) and that it was in the final heads of agreement negotiations with two international insurers with the intention to create a two-party underwriter panel.
In our view, CVO represents an attractive business exposed to industries growing at above GDP levels, pays a reasonable fully franked dividend yield of ~4.0% and is trading below our assessed Intrinsic Value of ~$1.55 with a near term catalyst likely to see the gap between the current price and our value close.
Stephen Wood is a senior analyst at Clime Investment Management.