Even though Cover-More Group Ltd (ASX:CVO) reported respectable half-year earnings figures (details here) they’ve been dumped by the market off the back of a downbeat outlook in Australian outbound travel. Is this a chance for a patient long-term investor to swoop?
A good starting point for all investment decisions is to determine if the company has a quality business. With a market-leading position in Australian travel insurance & the medical assistance market, Cover-More has this covered.
Investors in the stock can also expect to sleep soundly at night, another hallmark of a quality stock. Most insurers underwrite their own risk which means they will take a hit if claims are higher than expected – this is not the case with Cover More as the risk is borne by their reinsurer. Not being an underwriter has other benefits such as not being subject to APRA’s supervision, which alleviates the company from onerous compliance costs.
Another consideration in analysing a downtrodden company is whether the business’s current situation is structural or cyclical. Poor consumer sentiment and the low Australian dollar are the main drivers of the company’s dim outlook. However Flight Centre Travel Group Ltd (ASX: FLT) – a major distributor of Cover-More’s policies, is seeing signs of a positive recovery with airlines starting to discount key international routes. This, along with the fact that the travel industry has historically been resilient in the face of endemics, recessions and terrorism suggest that the current situation is cyclical.
So far I’ve looked at the rear-view mirror, but the future does hold a lot of promise. Cover-More currently has a small presence across several Asian countries and has earmarked this region as a source of future growth. Of the locations that it operates in, I believe India holds the most promise.
Although outbound travel has grown spectacularly for the past decade, uptake of travel insurance has not kept pace. The main reason for this is a general lack of awareness by the public in these products. TrawellTag Cover-More, Cover-More’s Indian subsidiary, is addressing this by running an internationally acclaimed training program for travel agents across 20 cities.
There are other reasons to be optimistic on travel insurance growth in India. Compared to the rest of Asia, Indian travellers are the most extravagant spenders on hotels so they have the most to lose if travel plans are unexpectedly disrupted. The strong growth in smart phones is another bright spot.
Smart phones are the most popular item claimed under travel insurance – given how easy they are to lose (or steal) and the fact they’re a very handy camera it’s not difficult to see why. With continued growth in smart phone uptake coming from a low base (10% market penetration vs 65% in Australia), this could be a significant driver for travel insurance demand.
Not all companies are a great buy regardless of the price, and Cover-More is no exception. In the most optimistic case – assuming that second half net profits will also grow at 26%, the stock would trade on a forward P/E of 18x. Although this isn’t expensive it definitely isn’t a bargain, and considering how unlikely this scenario is I would wait for further weakness in the price before jumping in.
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Motley Fool contributor Simon Chan owns shares in Flight Centre Travel Group Ltd.