MENU

Is insurance group Cover-More a good investment?

Travel and medical insurance group Cover-More (ASX: CVO) debuted on the ASX last week at $2, valuing the company at $635 million and raising $521 million for its owners. The shares closed last week at $1.79, just over 10% down from its listing price.

What is Cover-More?

Cover-More offers travel and medical insurance to customers in Australia and Asia. The company has been operating for 27 years and is estimated to hold 46% of the domestic travel insurance market. Cover-More also owns Davidson Trahaire Corpsych, an employee assistance company that services over 700 companies. Prior to the float, the company was owned 83% by private-equity group Crescent Capital Partners and 17% by management.

What’s to like?

The main attraction of Cover-More is its dominant market share and growth forecast. Cover-More has an Asian presence and plans to expand it in coming years. The proceeds from the float will be used to lower debt, purchase an Indian business and pay out Crescent Capital. This should leave the company in a good position to expand into Asia and maintain its Australian market share. Additionally, despite being priced at 23 times forecast 2014 profit, the highest ever multiple for a float above half-a-billion dollars, the float was oversubscribed and management were extremely pleased with the calibre of investors on its registry.

An added bonus is that the current owners will keep some skin in the game following the float. Management will retain 4.6% of the company, while Crescent Capital will maintain a 13% stake, which it is obliged to hold until Cover More’s 2014 results are released.

But why the 10% fall last week?

Market commentary about the debut highlighted the company’s heavy exposure to Flight Centre (ASX: FLT) customers, the high multiple it was being sold on, and weak market sentiment due to the lower Australian dollar. Additionally, the company has a multitude of smaller competitors, who might undercut Cover-More in the future.

There are also concerns about investor fatigue following the 61 listings so far in 2013, of which 23 have been in December. Cover-More’s poor opening follows the disappointing debut of a number of recent floats. Pact Group Holdings (ASX: PGH) fell 13% on its first day, while Nine Entertainment (ASX: NEC) and Dick Smith (ASX: DSH) are yet to trade above their IPO prices.

Foolish takeaway

Interest in Cover-More’s float was strong, and the company is now trading at a 10% discount to what many major funds valued it at just a week ago. Management is keeping skin in the game and the company will be expanding further into Asia in coming years. Furthermore, the Australian business is expected to deliver 20% revenue growth in 2014 and maintain or grow its market dominance.

Looking for income ideas?

If you're interested in other stocks paying big, reliable dividends, you should discover The Motley Fool's favourite income idea for 2014 in our brand-new, FREE research report, including a full investment analysis! Simply click here for your FREE copy of "The Motley Fool's Top Dividend Stock for 2014."

Motley Fool contributor Andrew Mudie does not own shares in any of the companies mentioned.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss a very important event! Chief Investment Advisor Scott Phillips and his team at Motley Fool Share Advisor are about to reveal their latest official stock recommendation. The premium “buy alert” will be unveiled to members and you can be among the first to act on the tip.

Don’t let this opportunity pass you by – this is your chance to get in early!

Simply enter your email now to find out how you can get instant access.

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our Financial Services Guide (FSG) for more information.