Cover-More wires future upside to global expansion

Despite slowing growth in outbound travel, and declining margin compression – courtesy of a weaker A$ against the US$ [the currency of many medical claims], plus a price hike in policies to cover rising claim costs, specialist insurer Cover-More Group (ASX: CVO) has still managed to accelerate growth in the first quarter, up 8.5% in Australia and 10.2% globally, and is still on track to deliver strong earnings growth in full year 2016.

Given that premiums have only gone up around 5%, Cover-More shouldn’t experience any erosion of its 40% share of Australia’s travel insurance market.

However, with the A$ around 8% lower since the travel insurer released its full-year results last August, some analysts’ have downgraded their earnings forecast for the next three years by between 4-6%. Growth expectations in gross written premiums for the financial year have also been lowered from 14.5%, but remain in double digits at around 10.2%.

Nevertheless, having been oversold during the share market carnage earlier this year, Cover-More appears attractively priced for those who believe in the stock’s future growth trajectory.

Much of the stock’s growth upside relies on its scalable business model and plans to expand its international footprint beyond Asia, NZ, and the UK and into the US, and the fast-growing markets of China and India.

Recent results show strong growth internationally with sales increasing 22% in Asia and EBITDA up 50%. Asia contributed 15% of full year 2015 sales, up from 10% in full year 2014. Sales also grew strongly in NZ (35%) and the UK (28%), albeit from a low base.

In the June quarter Cover-More is expected to enter the North American market, which has an annual gross written premium value of $US4.8 billion, compared with $US722 million annually in Australia.

The recent appointment of Andrew Byrne as Group chief operating officer is also expected to accelerate the company’s inroads within the US.

What differentiates Cover-More from its competitors is its multichannel distribution network across agents, intermediaries and direct sales. It has exclusive partnerships with Australia’s dominant travel retailers Flight Centre (ASX: FLT) – which contributes around a quarter of operating earnings – and Helloworld.

Other well-known partners include Harvey World Travel, Travelscene American Express, Medibank, Australia Post, Malaysia Airlines and Air NZ.

The stock’s ability to increase full year 2015 earnings by 14% – driven by 10% growth in travel insurance sales – in the face of a 19% fall in the A$ is testimony to the quality of its management team led by group CEO Peter Edwards.

Having listed in 2013 at $2 a share, around two thirds of Cover-More’s revenue comes from travel insurance, with the remainder generated through its medical assistance business.

A key ancillary product is the IMPULSE system (launched in 2014), an e-commerce optimisation product that can be integrated with partner systems. IMPULSE tailors insurance products to travellers and has proven to increase sales conversions for partners.

Cover-More also recently launched Global SIM, a proprietary product providing travellers with affordable calls and internet connectivity, and is currently developing an international currency card. Both innovations complement the medical assistance business by enabling geolocation and more efficient claims processing.

There’s lots to like about Cover-More’s technologically driven ‘capital-light’ and highly scalable business model, which allows many of its products to be easily integrated into its large network of distribution partners. This also lets management focus on the other elements of the insurance value chain including product development, pricing, distribution strategies, and claims management.

Despite the stock’s disappointing debut on the ASX, it has strong long-term cash flow relative to reported profit, and is expected to continue delivering the exceptional earnings per share (EPS) growth witnessed over the last two years; with EPS forecast to grow from $0.08 in 2015 to $0.11, $0.13 and $0.14 in 2016, 2017, and 2018 respectively.

Return on equity (ROE) is also expected to grow from 12.61% in 2015 to 16.65%, 18.93% and 20.79% in 2016, 2017, and 2018 respectively. The stock also has an attractive cash flow ratio of 2.22, a modest net-debt to equity of 15.92%, and pays a (fully franked) dividend of 4.58%.

Based on some 12 months targets in excess of $2.50, the current share price makes for an attractive entry point.

Watch out for greater disclosure into Cover-More’s expansion into the US and beyond.