Have you ever heard of the listed niche insurer, Cover-More Group Ltd (ASX: CVO)? If the answer is "no" then you are certainly not alone and that is exactly why this little-known company could be a great opportunity.
While many investors limit their focus to the biggest but not necessarily the best companies, investors looking for an edge often prefer to delve into stocks which are smaller, less widely owned and 'out-of-the-spotlight'.
When it comes to the insurance sector most investors would claim that the only two pure play choices are QBE Insurance Group Ltd (ASX: QBE) and Insurance Australia Group Limited (ASX: IAG). They would also likely make mention of AMP Limited (ASX: AMP) and Suncorp Group Ltd (ASX: SUN) as they both operate large insurance businesses as well. These four stocks however only cover the big-cap space.
Meanwhile if investors extend themselves into the mid-cap space other insurance stocks are available including the $650 million Cover-More which remains relatively undiscovered partially because of its size but also because it only listed via initial public offering (IPO) in December 2013.
Cover-More's IPO was priced at $2 per share, however a disappointing listing saw the stock trade more than 10% below its offer price until late February. Since then, shares in the insurer have been as high as $2.49 but are currently trading around $2.10.
Here are three reasons why Cover-More could be the best pick of the insurance sector.
1) Less complicated – The problem with investing in the big insurers is the complexity of their operations which makes truly understanding their businesses and particularly their risk profiles very challenging. While Cover-More's financials are still complicated, its niche travel insurance focus – of which it has a 40% market share in Australia – makes it more understandable from a risk point-of-view.
2) Valuation – Broker Bell Potter recently initiated coverage with a "buy" recommendation and a price target of $2.62. At today's price this implies upside of 25%.
3) Yield – The prospectus states an indicative dividend yield of 3% (based on the $2 per share float price). While this yield may not get some investors excited, the growth rate experienced by Cover-More in the past few years – EBITDA has grown at a compound annual growth rate of 27% over the past six years – could suggest a much higher future yield.
