Discovery sees opportunities
Discovery, the South African insurer starting its own bank, will continue to invest in businesses in its main market even as SA grapples with a recession.
Discovery, the insurer which is starting its own bank, will continue to invest in businesses in its main market even as SA grapples with a recession.
“I am a great believer that opportunities are not in good times,” CEO Adrian Gore said on Wednesday. “They are in difficult times. We remain convinced these are times to invest and build so that when things come up out of the trough you are in a very strong position.”
The CEO’s comments come after data released on Tuesday showed that SA’s economy unexpectedly shrank for the second consecutive quarter in the three months to end-June.
President Cyril Ramaphosa is trying to restore investor confidence battered by almost nine years of misrule by his predecessor, Jacob Zuma, and amid an escalating global trade war that has soured sentiment towards emerging markets.
The firm may invest R10bn in the country, Gore said, without giving a time frame. Discovery invested 7% of its earnings in the year to end-June in new initiatives at its various units, including the bank it plans to begin by the end of 2018 and a commercial insurance business.
Discovery reported a 16% increase in adjusted earnings to R5.4bn on Tuesday.
“I’ve seen what a successful business can do for job creation, to investment,” he said.
“We’ve created directly probably 5,000 jobs in the last five years and probably indirectly from that multiples of jobs,” he said.
Gore started Discovery as a private health insurer in 1992. It has since grown into investments, credit cards, life and property cover, and is the largest distributor of Apple watches in SA through an incentive programme that offers members discounts for keeping healthy. The programme now spans the US, China, Europe, Singapore, Japan and Australia.
“Opportunities are underpriced in bad times, that’s for sure, and that’s why we are building. I remain optimistic that the long term is sound and that’s why we’re investing,” Gore said.
Ramaphosa is also having to contend with an official unemployment rate of 27.2%, a near 15-year high, and a currency that has weakened 20% against the dollar in 2018.
While the president has made progress in a campaign to attract $100bn in new investment to bolster growth, his plans have been undermined by a decision by his ANC to amend the constitution to make it easier for land to be expropriated without compensation to help transfer more ownership to black farmers two decades after the end of apartheid.
“We need leadership from business and government and civil society to give people hope that these things need to be dealt with properly and we can get through them,” Gore said.
“What we do need is leadership with vision and a bit of patience. Give our president time,” he said.
On the face of it, Discovery’s results should have helped to keep its buoyant share price afloat. After all, normalised headline earnings growth of 16% in an SA hit by recession is commendable.
But the market isn’t buying it. Of the analysts who formally cover Discovery as tracked by Bloomberg, there is rarely such wide dissent on what a company should be worth.
In the case of Renaissance Capital, its target price on the share is R91 – implying a correction of as much as 45%. Avior, however, which rates the share an “outperform”, has a 12-month target price of R258.74 – a potential gain of 54% from its present levels.
Perhaps one of the issues for sceptics is that Discovery’s biggest profit generators are still almost entirely South African, and that the company’s expansion abroad is still mainly funded by its operations at home. Its “emerging businesses” have turned profitable, making R158m in the year to June from a R170m loss in 2017.
But how sustainable Discovery’s rand earnings are must be a big question, when not only the economy is contracting, but the value of the currency too. Particularly if those earnings are to support businesses in hardcurrency jurisdictions such as the UK and US.
Another issue is the difference between Discovery’s embedded value, now at R65.6bn, and its market capitalisation, at roughly R107bn.
Its embedded value is essentially net asset value plus the present value of in-force business. The market is clearly expecting great things from Discovery’s emerging operations, which may or may not materialise, suggesting that its share price is, in a word, stretched.
Few will forget the panic that gripped SA after health minister Aaron Motsoaledi dropped the listeriosis bombshell on March 3 and confirmed that the source of the outbreak was a ready-to-eat processed meat plant owned by Tiger Brands in Polokwane.
As retailers removed processed meat products from shelves, Tiger Brands’s world was turned on its head. Overnight the company was the face of listeriosis.
The following morning, investors dumped Tiger Brands shares and R5.7bn was cut from its market capitalisation within two hours.
Motsoaledi this week declared that SA was listeriosisfree. But Tiger Brands’s response to the news has been cautious. It does not seem to be in a hurry to reopen the four facilities it closed after the outbreak. Contrary to its initial defensive stance, the company appears to be taking the moral high ground. It says it wants to drive changes in the food safety system in SA.
Perhaps it’s the realisation that this week’s announcement does not signal the end of its woes. To begin with, the firm must still deal with the classaction suit. This could drag on for a long time, unless the company and the lawyers representing the victims decide to resolve the matter speedily.
The announcement does free up Tiger Brands to focus on the task of rebuilding trust in the market, while figuring out how it will claw back lost market share in an environment that is difficult for consumer-facing companies.