Discovery Trading Update - Suspending The Dividend

Discovery is a widely held stock in our local, Rand-denominated JSE portfolios. As everyone knows, this technology-driven healthcare and insurance group was founded by Adrian Gore in 1992 and has a fancy new headquarters in Sandton.

Owning Discovery was a natural decision for us, because we like the technology and healthcare sectors and it has done well over the years. They sell people medical aid, life insurance, home insurance, a bank account, and investments. They glue it all together with the Vitality incentive scheme, so their lapse rates are really low (in other words, they have a stickier client base).

Discovery's customers are mostly affluent people who are holding up better in these rough times. According to the company the average sum assured in Discovery Life is R2.8 million and 87% of clients are classified in the highest socio-economic rating class (earning above R50 000 per month or having a tertiary degree, or both).

Discovery just put out a trading statement for the forthcoming year ending 30 June 2020. They seem to be doing ok, but have announced a R3.3 billion provision for expected future effects of Covid-19. This is to cover the potential claims and lapse impact of the pandemic, based on estimations of future mortality, morbidity and economic decline.

Their in-house actuaries came up with a range of scenarios ranging from stressed, central (prudent best estimate) and light. The management team has also recommended that the group should suspend its ordinary dividend in June. The reintroduction of dividends will be considered when appropriate.



New business isn't looking too bad, increasing by 4% for the eleven months ended 31 May 2020 compared to the prior corresponding period. The Ping An Health operation in China saw its strongest sales ever throughout the Covid-19 period. The product is sold through brokers and direct-to-consumer on their mobile app.

The Discovery Bank business is still a drag on earnings. It cost a bomb to launch, but at least they now have 177 000 clients and 330 000 accounts and deposits have grown to R2.1 billion. Overall credit utilisation has declined during the lockdown and arrears, including non-performing loans, are still within expectations.

Discovery shares trade at R105 per share today. Their all-time high was about R185 per share. They are lower now because the South African government continues to threaten to introduce a national health insurance (NHI) system and put their medical aid operation out of business. Also, South Africa's debt situation raises concerns about customer growth and funding costs.

We suggest that Discovery shareholders just hang in there. The business will survive these tough times. Covid-19 has underlined the need for customers to have both life and health insurance. This episode in human history might even be good for business in time.