How long have we held the stock?

We have held the stock since its initial public offering in December 2013. Its somewhat disappointing debut on the ASX (-11% on day one of trade) has allowed our funds to significantly add to their holdings.

What do you like about it?

We are always impressed with growth franchises that have seasoned, high energy but disciplined management teams. Cover-More is a specialist travel insurance and medical assistance provider, with operations anchored in Australia but spread through Asia and the UK. Significantly for investors, Cover-More commands a 40% market share and is twice the size of its next nearest competitor. The company is well positioned to participate in the continuing growth of outbound Australian tourism, as well as developing markets, such as China and India, where the company has nascent operations.

How is it better than its competitors?

Cover-More chiefly markets travel insurance and medical assistance products for travellers, whereas its competitors’ travel insurance offerings are only one component in a suite of insurance products, as seen with Allianz, NRMA or One Path. It is probable that its after sales service, such as call centres and concierge services, are best of breed. We like the fact that the underwriting risk is borne by someone else (Munich Reinsurance) so the company is able to operate as a global service company, rather than having to carry much of the risk associated with claims management.

What do you like about its management?

We became comfortable rather quickly with group chief executive officer Peter Edwards. He has 10 years’ experience in the travel insurance sector, which includes a senior management role with competitor, Allianz Global.  He and his team have articulated a lucid growth strategy for both domestic and offshore markets. He is au fait with balance sheet optimisation, with the business able to operate a negative working capital model (suppliers effectively funding debtors) and healthy profit-cash flow conversion.

What is your target price?

We don’t set share price targets for our investee companies, preferring a relative valuation methodology. Simply, as long as the companies underlying prospective earnings per share stream is appropriately rated by the market (PE Ratio) and the business maintains its superior qualitative features, then we will maintain our investment. Right now, the stock is trading on around 21 times for near term growth of circa 16%. We view the prospectus numbers to be on the conservative side.

At what point would you sell it?

We would have reason to consider a position if our investment process indicated the ‘price-for-earnings-growth’ was excessive and uncomfortably above market in the first instance. We would be alarmed if there was any meaningful change to senior management or any shift in the very supportive industry dynamics the company presently enjoys. The travel insurance market has grown at a compound annual growth rate (CAGR) of 8.5% since 2008 and Cover-More’s core markets of Australia, China and India are forecast to grow at rates well in excess of this pace. The company has a number of significant distribution agreements in place, with Flight Centre representing around 25% of Cover-More’s FY14 forecast. This contract is not due for renewal until 2019, so for now, the only risk here is performance of that retail franchise.

How much as it added/subtracted to your portfolio?

The stock is up 6% from its December listing, following a very forgettable early trading experience. We expect good share price performance over the next 12 months.

Is it a liquid stock?

Very much so. The stock has found favour with a number of specialist small cap investors who have taken advantage of the liquidity bulge normally associated with a new listing to position themselves.

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