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.

Finweek English Edition - - MARKETPLACE - Ed­i­to­rial@fin­week.co.za has been rated as one of the top 5 tech­ni­cal an­a­lysts in South Africa. She has been a tech­ni­cal an­a­lyst for 10 years, work­ing for BJM, Noah Fi­nan­cial In­no­va­tion and for Stan­dard Bank as part of the Re­search Team in the Trea­sury Div

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.

What next?

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.

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