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CVO Details
Takeover offer from Zurich Insurance Group: Cover-More Group Ltd (ASX: CVO) stock surged about 42.2% on December 12, 2016 as Zurich Insurance Group issued a takeover offer to the group. The group entered into a Scheme Implementation Agreement (SIA) with the latter wherein Zurich Insurance Company, a direct subsidiary of Zurich Insurance Group Ltd (SWX: ZURN), would buy entire stake in CVO. CVO’s shareholders would get A$1.95 cash per share (Scheme Consideration), while the group can pay an interim and/or special dividend (which may be franked) on or prior to implementation of the Scheme. This A$1.95 per share indicates an EV/ pro-forma FY16 EBITDA multiple of 15.3x, which is said to be attractive considering the trading multiple of 11.0x; and represents an implied market capitalization of A$741 million. Management is positive about this SIA as Zurich’s global platform would enable them to accelerate their global travel insurance market growth. Meanwhile, the group’s CEO Mike Emmett, would have the opportunity to earn up to half the Group CEO’s annual fixed remuneration. CVO earlier made an agreement with Berkshire Hathaway Specialty Insurance Company (BHSI) last month. The group had also acquired Travelex Insurance Services in the USA, which is the third largest retail travel insurance specialist in the North American market. Even with BHSI, the group expanded their USA online travel insurance market.
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FY16 performance (Source: Company Reports)
Stock performance: CVO stock lost over 37.7% in this year to date (as of December 09, 2016) impacted by their lower than estimated FY16 results. Management also reported a slower start for this financial year. On the other hand, the group has been making efforts to cut overheads and expected most of these benefits to reap benefits in second half of FY17 and into FY18. Primarily, delayed impact of cost savings and claims costs have been expected to result in a greater proportion of group earnings being delivered in 2H FY17. Moreover, CVO expected an improving net revenue for each successive month. CVO also focused on their Conversion rates which were below budget. CVO also tried to enhance their risk profile of the portfolio. The group expected to reap the earnings benefits in the second half of fiscal year of 2017. Cover-More forecasted an EBITDA in the range of $54 million to $57 million for FY17, which comprises contribution from Travelex Insurance Services. CVO stock has been consolidating since the last three months increasing over 1.6% (as of December 09, 2016). However, the group forecasted for a higher claims costs in the second half. Moreover, the group’s heavy rise in the stock on December 12, 2016 placed them at higher levels. We believe investors need to leverage this rise as a profit booking opportunity to exit and we give a “SELL” recommendation on the stock at the current price of $1.87
CVO Daily Chart (Source: Thomson Reuters)
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