Discovery trading update. At face value I can understand the market reaction, sending the stock lower by nearly nine percent in the first hour of trade. Normalised headline earnings per share are likely to be between zero to five percent more. Huh? And Headline Earnings per Share and Basic Earnings per Share are likely to be 45 to 55 percent lower. What? Why? first, let us look at the company measure they like to use, Normalised headline earnings per share were impacted by two factors. In their words:
"An increased investment in new initiatives, including the recently awarded Bankmed medical scheme administration and managed care contract, the expansion of the business model into banking and increased costs arising from growth in Ping An Health and other International Partner Markets; and Higher than expected costs associated with moving VitalityHealth in the UK onto its own system infrastructure."
I don't mind if a business spends a lot of money on ramping up their new businesses. Amazon is a great example of a business that has significantly increased their market share through heavy investment. Profitability is almost secondary to Jeff Bezos, one of the most amazing people in the known universe. Adrian Gore, the CEO of Discovery is one of those people. I know that as a significant shareholder he sweats the small stuff, lives the companies ambitions alongside the shareholders. And the major fall in HEPS and EPS? What is that all about. Again, the company explains:
"Headline earnings per share and basic earnings per share for the prior period were positively impacted by the once-off accounting treatment resulting from the lapsing of the put options Prudential held in respect of its interest in the UK joint venture - this was due to Discovery's purchase of the Prudential's remaining 25% of the joint venture in November 2014. As this once-off increase in profits occurred during the Company's 2015 financial year, all results announcements relating to the 2015 financial year will be affected for comparative purposes, as previously advised in the results announcement for the year ended 30 June 2015 released on SENS on 10 September 2015."
The results themselves are a week today. We continue to recommend this fast growing innovative business as a buy, and are using the lower prices as an opportunity to add, most especially if you are underweight the stock in your portfolio.