Discovery full year numbers, good business!

Possibly one of the best brands amongst middle class South Africans, Discovery, reported full year numbers to the end of June 2011, and the results were well received by the markets. The stock gained 2.6 percent on the day, versus a market that was up one quarter of a percent. They really have done well. I mumbled something on the box yesterday morning about the clouds of NHI hanging over their future, the funding thereof, perhaps some marginal folks on the screens would have to stop contributing to private healthcare. Perhaps, we are not 100 percent sure yet.

The numbers from the fellows over at Discovery were very good. No, rephrase, in the context, very good, well done guys, three cheers. A whole lot happened in the last financial year, the launch of Discovery Insure, the JV in the US with Humana (and the launch in the US of HumanaVitality) plus the acquisition of Standard Life Healthcare in the UK and the subsequent integration in Pruhealth (where Discovery increased their stake to 75 percent from 50 percent). And do not forget the Chinese JV with Ping An Health, which covers 300,000 lives with sales of 155 million ZAR for the six months. Early days still.

If ever you wanted or needed a nice explanation of embedded value (as complicated as it is), then Discovery gave you a top notch one. Explanation that is:

"The embedded value of Discovery at 30 June 2011 consists of the following components:

- the free surplus attributed to the covered business at the valuation date;

- plus: the required capital to support the in-force covered business at the valuation date;

- plus: the present value of expected future shareholder cash flows from the in-force business;

- less: the cost of required capital and secondary tax on companies ("STC")."

Got that? Feel better?

That Adrian Gore guy has an enormous amount of energy, and is passionate about the business that he founded, after all he is still listed as a 9.34 percent shareholder. Of a 23.2 billion market cap company. That means that he is a made billionaire times two, in around two decades. So, it is always easier to back someone who backs themselves. A simple example. Remember the launch of the Discovery credit card? Remember? According to the release, their card captured 8.9 percent of the point of sale market share. I remember an interview with Gore in which he said something along the lines that their products must try and achieve a 15 percent plus market share. Those are his and the businesses goals.

Numbers, Discovery Life (1.558 bn ZAR operating profits) and Discovery Health (1.357 bn ZAR operating profits) dwarf the other two, Vitality and Discovery Invest (101 million ZAR operating profits), in the overall mix. Headline earnings clocked 1.638 billion ZAR, translating into HEPS of 295.3 cents a share, a six percent increase on last year. The dividend for the second half was 48 cents per share bringing it to a total of 90 cents for the year. Is it expensive? I guess there has always been the premium built into the company, their ability to innovate in the space that they are comfortable with. And then the ability to innovate and compete outside of that (think credit cards, investments, life cover and now short term insurance) means that they deserve a premium. Because to innovate is one thing, to be as successful as they have, is another. We like healthcare as a whole, with more middle class people living longer we think that it is a growth sector. But we prefer Aspen.