Shares of travel insurer, Cover-More Group Ltd (ASX: CVO), fell by as much as 7.4% today after the company announced a 27.5% drop in full year profits.
Investors had already been warned to expect a decline in earnings earlier in the year, but it appears the result came in even lower than market expectations.
Some of the key points from the result included:
- Group gross sales increased by 7.6% to $502.1 million
- Gross margins declined by 3.2% to $88.2 million
- EBITDA declined 14.2% to $44.6 million
- Net profit after tax declined 27.5% to $18.7 million
- Basic earnings per share (EPS) of 5.9 cents, down 27.2%
- Final fully franked dividend of 2.6 cents per share, bringing the full year dividend to 4.7 cents per share
Although the overall result was fairly lacklustre, Cover-More was quick to point out that the company did perform better in the second half thanks to a stabilisation in premiums paid out to underwriters. This was the major issue affecting profitability in the first half, which saw profit margins slashed as a result of higher claim costs forcing the company to pay out higher underwriting fees.
A $2.1 million increase in overhead costs and margin contraction in the Medical Assistance division also added to the weak result.
Despite these negatives, Cover-More did make progress on its international expansion strategy. Gross sales into Asia grew at more than 20% with sales in India growing at an impressive 38%. Importantly, the increase in sales is translating into growing profits and the Asia region now generates 22% of the company's overall profit, up from 15% in FY15.
The travel insurer has also recently commenced distribution in the United States thanks to partnerships with Flight Centre Travel Group Ltd (ASX: FLT) and Berkshire Hathaway Travel Protection. These initiatives are expected to begin to contribute to earnings in FY17.
Domestically, the demand for travel insurance remains strong and the Australian business recorded sales growth of 7.2%, up from 6.3% a year earlier.
Outlook
Cover-More has provided a fairly upbeat outlook for FY17, although the company did not provide any specific earnings guidance.
The company expects sales growth to remain strong in Australia and overseas, although I suspect its main priority in the short term will be negotiating a favourable long term underwriting arrangement that will restore the company's operating margins.
Valuation
At $1.44, Cover-More shares are currently trading on a trailing price-to-earnings ratio of around 24 and a trailing dividend yield of 3.3%. This is not particularly cheap especially when you consider the travel insurer is yet to resolve the issue causing it the biggest headache at the moment – a favourable underwriting agreement.
Foolish takeaway
There is a lot to like about Cover-More's expansion overseas and its capital light operating model, but until it can restore its operating margins back to prior levels, I think investors may be best served by leaving it on their watch lists for now.
