Dis­cov­ery – an ex­cel­lent growth share

Over­seas in­ter­ests still needs time but show grow­ing prom­ise

Finweek English Edition - - Creating wealth money matters - LU­CAS DE LANGE

ONE OF THE BEST GROWTH shares, which has treated its share­hold­ers very well since its cur­rent bull mar­ket started in 2003 – it has climbed by nearly 350% – is the Dis­cov­ery group. The com­pany has again pro­duced ex­cel­lent re­sults. Per­haps more im­por­tant is that vir­tu­ally ev­ery di­vi­sion is poised for fur­ther strong growth. De­spite its rapid growth, it has dis­trib­uted a maiden div­i­dend for its past fi­nan­cial year – to June 2006. It was 27c, and judg­ing by the half-year fig­ures to De­cem­ber, it’s now go­ing to join that se­lect group of com­pa­nies that in­crease their div­i­dends to share­hold­ers reg­u­larly.

Its op­er­at­ing profit in the six months to De­cem­ber shot up by 49% to R530m (ex­clud­ing the one-off black em­pow­er­ment deal), which re­sulted in a 29% in­crease in the di­luted head­line earn­ings per share of 70,1c.

Or­ganic growth in the group’s lo­cal com­pa­nies was strong, as usual, while the losses at its US sub­sidiary, Des­tiny, fell by nearly 60% to R33m af­ter it in­creased its pre­mi­ums last year. Pruhealth in the UK is still putting pres­sure on the group, but the ex­cep­tion­ally strong growth of 260% in new busi­ness that it an­nounced was a pleas­ant sur­prise. There’s a healthy scep­ti­cism among SA in­vestors about the suc­cess that lo­cal com­pa­nies, es­pe­cially fi­nan­cial groups, can achieve in the highly com­pet­i­tive US and UK mar­kets, but the hal­fyear re­port shows that – just like Old Mu­tual and In­vestec – Dis­cov­ery has the po­ten­tial to re­ward share­hold­ers ex­cep­tion­ally well as the over­seas com­pa­nies be­come es­tab­lished.

Dis­cov­ery dif­fers from the other large in­sur­ers in that it’s only de­pen­dent on the JSE to a lim­ited ex­tent. Less than 10% of Dis­cov­ery’s val­u­a­tion con­sists of listed shares. The latest San­lam re­port, for ex­am­ple, con­firms how it’s mov­ing in the di­rec­tion of a di­ver­si­fied wealth man­ager. In 2002, its life di­vi­sion pro­duced 73% of its earn­ings, but this fell to 52% last year. At the same time, San­lam In­vest­ment Man­age­ment (SIM) last year in­creased its op­er­at­ing profit by 54% to just over R1bn.

Dis­cov­ery’s lim­ited ex­po­sure to a vul­ner­a­ble stock mar­ket, along with its strong po­si­tion in the health­care mar­ket and healthy growth in life busi­ness, ac­tu­ally makes it a de­fen­sive stock. In­vestors who are un­easy about the stock mar­ket should there­fore choose it rather than the large life in­sur­ers.

How suc­cess­ful its health­care busi­ness is, is shown by the fact that it has a mar­ket share of about one-third in the so-called open med­i­cal aid schemes (the re­stricted schemes serve, for ex­am­ple, only a com­pany’s em­ploy­ees), while its share in the to­tal mar­ket for health­care ad­min­is­tra­tion is put at 24%.

How­ever, the group also plans to de­velop wealth man­age­ment and re­cently in­tro­duced the Re­tire­ment Op­ti­miser as its first in­vest­ment prod­uct. An im­por­tant ad­van­tage when it mar­kets a new prod­uct is that it al­ready has such a large client base. For ex­am­ple, Dis­cov­ery Health’s med­i­cal scheme cov­ers more than 2m peo­ple. The fees it charges for the ad­min­is­tra­tion of the fund rep­re­sented its largest source of in­come in its latest fi­nan­cial year.

As a growth share, its share price usu­ally trades at a large pre­mium above its embed­ded value, and the share can there­fore not be re­garded as cheap. At the same time, there are the over­seas com­pa­nies that are show­ing in­creas­ing prom­ise and are ac­tu­ally a bonus. If they per­form as ex­pected that will make Dis­cov­ery one of the most promis­ing growth shares in the mar­ket. That many in­formed in­vestors re­alise this is shown by the steady ac­cu­mu­la­tion of the share, as re­flected in the graph of its price/vol­ume trend. How­ever, there’s no hurry to buy. Wait for mar­ket cor­rec­tions and then buy for the long term.


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