Cover-More Delivers On Growth Promise

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This story features FLIGHT CENTRE TRAVEL GROUP LIMITED, and other companies.
For more info SHARE ANALYSIS: FLT
The company is included in ASX200, ASX300 and ALL-ORDS

-Substantial growth upside
-Underpinned by key partnerships
 

By Eva Brocklehurst

Australia's largest travel insurer, Cover-More ((CVO)), delivered a clearly positive interim report, with brokers remarking on the momentum in both revenue and margins.

Macquarie noted all operations and segments were tracking ahead of the prospectus forecasts, and expectations. Gross written premium (GWP) rose 24%, while earnings from insurance increased 29.6%. The broker observes margin improvement featured, especially in the medical assistance segment, and reflects the investment that was undertaken to improve productivity and efficiency. The DTC employee assistance segment has secured its first corporate integrated wellness program, with forecast annualised revenue of $2m, and Macquarie thinks this area has significant growth prospects.

Results were significantly above UBS estimates and the broker has lifted FY14 forecasts by 6.1%. UBS expects higher incremental returns over the next three years, heading to above 25% from around 18%. Another important feature of the result was the lift in insurance earnings/gross written premium margin which, at 8.6%, is on track to meet, or exceed, the implied level of 9.1% from the FY14 prospectus forecasts. This improvement indicates to UBS that Cover-More can retain some benefits of operating leverage without having to pass on all incremental gains to distribution channel partners.

The Air New Zealand venture, which commenced in December, is trading ahead of expectations. UBS finds this a most pleasing outcome, with early indications that New Zealand turnover could double underscoring the company's competitive advantage.  The Australian business is performing well with the agency channel growing due to the Flight Centre ((FLT)) distribution agreement. A partnership with Insurance Australia Group ((IAG)) started recently. Brokers consider that while the initial book is not big, in terms of the access to an expanded client base there is considerable upside.

What's new? A market review of the UK travel insurance proposition has been undertaken in conjunction with Flight Centre and Macquarie hears the company is just awaiting the sign-off from Flight Centre in order to roll out of a more differentiated product and service offering.

The business generates greater volumes in the second half because of the increased northern hemisphere sales coming from Australia and New Zealand, as well as a seasonal weighting to the second half within India. UBS expects this skew will increase marginally over the coming years as Asia grows as a proportion of total GWP. A word of caution: Macquarie advises against using FY13 earnings seasonality for FY14 forecasts, given a step up in margins was already being realised in the second half of FY13. Macquarie retains a Buy rating and $2.30 price target.

UBS believes growth upside in the medium term is substantial, given the recent entry into larger under penetrated markets. The company also offers rare listed exposure to the outbound leisure travel theme in Australasia and Asia. The risks come from concentration with key distributors such as Flight Centre, volatility in the Australian currency and irrational competition that harms pricing and margin. Longer-term the underwriting arrangement with Munich Re will need to be renewed in 2018. Still, over the next three years, UBS thinks there is sufficient head room in the GWP forecast profile to allow for modest delays or lower conversion of new contracts. The broker expects compound annual growth in earnings from FY13-16 of around 16%. Beyond FY16 UBS assumes GWP growth reverts to a normalised level of over 7%. UBS has a Buy rating and $2.30 price target.

See also, Cover-More Offers Attractive Travel Insurance Exposure on February 3 2014.
 

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