Investors wary of expansion plans
While the financial services company has seen profits and net income ticking up at a steady rate, it appears investors are leery of its new undertakings.
founded in 1992 as a small specialist risk insurer with a R10m investment from Rand Merchant Bank, today financial services group Discovery has a market capitalisation of over R77bn and operations around the world.
While it initially focused on medical insurance, the group offers a range of financial services, including life insurance, investment and savings products, short-term insurance and credit cards. Its Vitality wellness programme, which rewards members who make healthy lifestyle choices based on a scientifically proven model, has been rolled out internationally, notably in partnership with Ping An in China, Hong Kongheadquartered AIA Group in Southeast Asia, John Hancock in the US, and Generali in Europe.
In August 2015, Discovery was ranked 17th out of 51 companies in Fortune’s first-ever Change the World list, an index that ranks companies across the globe on the significance of their social impact. Discovery was included because it is one of the companies that aims to extend the life expectancy of its customers, and thereby creating a more profitable model for selling insurance, the judges said at the time.
Discovery recently released its results for the six months to end December, with income from new business growing at a whopping 27% to R8.4bn over the period. Over the past 10 years, income from new business grew at a compound annual growth rate of 15%.
Overall, net income was up 10% to R21.1bn, while profit from operations grew 6% to R2.7bn. Its investment for growth grew 64% to R402m.
However, profit for the period was down 49% to R1.8bn.
The group said the cost of moving Vitality Health insurance in the UK to its own system infrastructure, at a cost of £5m (R105m at current exchange rates), and its accelerated and substantial investment in new initiatives, including banking, international markets, and the launch of Vitality Active Rewards in collaboration with Apple, weighed on its performance.
But despite Discovery’s progressive expansion plans, the share price – down over 10% since the start of the year – reflects that some investors are less excited about its prospects. Many will remember Discovery’s failed foray into the US market with Destiny Health in the 2000s, when it lost about R1.3bn.
Possible scenario: Discovery is plateauing in the form of a headand-shoulders pattern. Major resistance encountered at 13 120c/ share, together with the bearish three-week relative strength index (RSI) could result in Discovery losing more of its value towards 10 785c/share. (An asset is seen as overbought once the RSI is near the 70 level, meaning that it may be overvalued.) Although the neckline won’t be breached below that level, downside to support at 9 735c/share could ensue. If that level fails to hold, the neckline would be breached – potentially triggering panic selling through 8 545c/share. Alternative scenario: To attract further buying towards 14 430c/ share, Discovery would have to trade above 13 120c/share and the three-week RSI must escape its bear trend. The objective of a head-and-shoulders pattern would only be negated above 15 580c/share.