Discovery 6M - Hurt by UK Operations

Discovery released its interim earnings yesterday that came short of expectations, including our own. This explains the recent sharp drop in the share price from R127 to R105.60 at market close yesterday. The Achilles heel was the VitalityLife business in the UK. It reversed its fortunes by 145%, due to high client churn by brokers and a hedge that went against the company.

Discovery's normalised headline earnings were down 11% to R2.1 billion, reflecting the VitalityLife's impact, which has not only been affected by the above reasons but also a very low interest rate environment. The company's new business annualised premium income as a whole grew by 17% to R11.11 billion thanks to the matured businesses growing spectacularly.

On an operational level, the other businesses called "emerging businesses" surged by 50% to R253 million, still a drop in the ocean for Discovery but headed in the right direction. Discovery said it continued to invest R1 billion in these new initiatives, despite a tough operating environment, because they're strong believers in organic growth.



Discovery is of the same view as us here at Vestact that as we live longer, healthcare spend will increase, meaning that private healthcare will become even more important than in the past. This includes an environment where NHI is prevalent; there is still a case for private healthcare for those who can afford it in their opinion.

The one thing that stood out was the early success of Discovery Bank which boasts over 78 000 clients with over 180 000 accounts, holding R1.2 billion in deposits and credit card utilisation of R1 billion. The company has spent a fortune establishing the bank, and they assured investors that they're on budget.

Discovery Bank client profiles differ dramatically to that of other online only challenger banks like Tyme Bank. Discovery has made it clear from the start that they're mostly interested in the affluent market which is what they've already captured through the Discovery Card, Discovery Invest, Discovery Health, Discovery Life and Discovery Insure ecosystem.

Finally, PingAn Health is firing on all cylinders with an increase of 28% in new business and a 59% increase in written premiums to R11.1 billion, leading to a 467% increase in after tax profits. However, don't get too excited just yet as this is a business still in its infancy and showing a profit margin of 1%, due to a high reinvestment of earnings.

In closing, Discovery isn't looking for the next big acquisition. They want to grow organically by targeting their current clients, using innovative ways, and hopefully current clients convince their peers to join the revolution. At R106, Discovery trades at the same level as it was in November 2014 with a business about roughly three times the size, it's a bargain!