Discovery surges despite earnings
• Group cites investment in bank, unexpected spike in big mortality claims
The Discovery share price surged as much as 8.8% on Friday, more than any one-day gain since February 2018, even as the financial services firm said annual earnings fell as it invested in new business units, including its bank.
Discovery’s share price surged up to 8.8% on Friday, more than any one-day gain since February 2018, as the financial-services firm said annual earnings fell as it invested in new business units, including its bank.
Discovery’s fledgling banking unit said in June it expected to add 1,000 clients a day by the end of August after an “early onboarding period”. For Discovery Bank to break even, about 500,000-600,000 clients are needed, according to the group.
Investments in the bank and other new businesses, together with an “unexpected spike” in large mortality claims at Discovery Life, dented earnings, Discovery said on Friday.
The group said its normalised headline earnings per share probably fell 5%-10% in the year to end-June. But it expects core new-business annualised premium income to grow about 13%, and the group’s financial position has improved.
Discovery said about a fifth of its earnings was spent on new businesses, notably Discovery Bank, Vitality Invest, Vitality1, umbrella funds and Discovery for Business. Spend on new businesses more than doubled on the previous year’s. As a result, Discovery’s borrowings rose and this pushed finance costs up about R240m.
While new businesses need more funding, the burden on profits will decrease, and profit growth is expected to return to consumer inflation plus 10%, Discovery said.
The share price rose to a high of R117.50 on Friday afternoon, before closing at R115.17, up 6.64%. Avior Capital Markets analyst Warwick Bam said this was the result of concern in the market not having played out.
The spike in high-value life insurance claims hit the bottom line in the second half of 2018, but did not repeat itself in the first six months of 2019, and profits have returned to their normal run rates, Bam said.
Most business units are running better than expected, with the exception of UK VitalityLife, though the problems there relate to the lower interest-rate environment and are not a reflection of poor management, Bam said.
“I think it is a surprise they are spending so much on the bank,” he said. “Although there have been delays, they are spending more than expected. But it’s potentially for the right reasons.” However, Electus Fund Managers co-head Richard Hasson said the trading update was slightly worse than the market expected. “The Discovery share price was already down 20% this month [August] before today’s trading update, so the positive move in the share price today feels more like a relief rally in that nothing majorly negative has been reported,” he said.
August’s share-price weakness was driven by overall market weakness but was also the potential negative effect National Health Insurance will have on the profitability of Discovery’s medical scheme business.
In the update, Discovery said it supports the recently published bill’s intentions, and it “is not expected to have a material long-term impact on the Discovery Health business”. The legislation could even “present new opportunities for growth and product innovation”.