Discovery – an excellent growth share
Overseas interests still needs time but show growing promise
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.