Stock of the Day – Cover-More Group (CVO) - SELL
CVO’s operating results surprised on the upside by 3% reiterating prospectus forecast guidance in June 2014. Given weak Australian travel bookings in 4Q14 impacted by the federal budget and soft consumer confidence 2H14 performance was better than expected and in line with prospectus guidance. CVO declared an ordinary dividend of 4.0cents per share plus a special dividend of 3.2 cents per share for the year given its strong position.
Company Highlights (Source – Company Reports)
CVO commented that there has been a recovery in the Australian travel insurance business so far in FY15 with solid volume growth post the weak run rate in 4Q14. Overall in FY15 we expect 2-4% net policy growth plus 3-4% increases across various distribution channels to lift the travel insurance margins and recover profitability. We now expect organic growth to be the primary growth in FY15 and indeed a bigger driver over the medium term a combination of pricing and volume.
Result Highlights (Source – Company Reports)
We do not expect any new distribution contracts to contribute materially to FY15 GWP growth. CVO has demonstrated its strong cash conversion and capital light attributes. Without external investment we expect surplus cash to accumulate at $10-$15m per annum. As mentioned previously we expect organic growth to be the primary driver of GWP growth in FY15 followed by growth from Asia and annualisation of new contracts signed in FY14.
CVO Daily Chart (Source – Thomson Reuters)
With regards to top line growth we expect a moderate improvement and stabilization of insurance margin via pricing and operating leverage to drive EBITDA growth over the next 3 years. Some of the key risks associated with CVO would be contract/concentration risk with key distribution partners (Flight Centre), foreign exchange volatility, pricing/margin risk from irrational competition and underwriting arrangement risk in the longer term upon renewal of current agreement with Munich RE in 2018. We believe the stock is fully priced at the current price and put the sell recommendation at the current price of $2.38.
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