If all goes according to plan, the financial services provider, Discovery, will be adding a banking segment to its offering in the coming years. However, profit and cash flow have taken a hit in recent months.
discovery,which was founded in 1992 as a medical aid provider, is one of South Africa’s most innovative financial services companies and has been successful in expanding its international footprint.
Its Vitality wellness programme has been particularly successful, earning Discovery 17th place in Fortune magazine’s Change the World Index of 51 companies in 2015. The business model is simple – Vitality incentivises people to be healthier and more active, thereby reducing the group’s medical aid costs. The model has been rolled out in a number of geographies, notably in partnership with Ping An in China, Hong Kongheadquartered AIA Group in Southeast Asia, John Hancock in the US and Generali in Europe.
Vitality’s intellectual capital has also given it an advantage in the life insurance space, as it can uniquely assess members’ risks. In addition, Discovery has been able to adapt its technology and dataanalysing abilities to assess risk in the short-term insurance space, notably by tracking people’s driving habits and pricing motor vehicle insurance accordingly.
The group, which also offers investment products, is now planning to launch banking operations in SA. It said in 2015 that it would spend R2.1bn to set up a retail bank in SA, using the same behavioural model described above. The Registrar of Banks approved its plans to start a bank in October, and Discovery has a year to meet certain conditions before a banking licence will be granted.
In the year to end June, Discovery reported a 22% increase in revenue from new business to R16.2bn, while the group’s overall operating profit increased by 11% to R6.4bn. However, profit for the year was down nearly 33% to R3.7bn. Its cash flow from operating activities also showed a significant decline, dropping from R3.4bn in the 2015 financial year to R985m in 2016. It also increased its borrowings in 2016 by net R4.4bn (2015 net increase: R459m).
Challenges include Discovery Health, which is facing headwinds from medical aid members increasingly resistant to aboveinflation price increases, and government’s plan to launch National Health Insurance (NHI). Growth in the group’s rand earnings base is slowing, while its hard currency base is partly loss making, according to experts who also believe Discovery has stretched itself too much.
Its financial performance and concerns about its expansion plans have weighed on the share price, which was trading 23% lower than its October 2015 high at the time of writing on 23 November.
Possible scenario: Discovery is consolidating between 13 170c/ share and 10 785c/share. The three-week relative strength index (RSI) negative divergence commenced in November 2014 – failing to support the all-time high at 15 580c/share – thus triggering the downward impetus. Discovery has held at 10 785c/ share a few times before, but with the RSI still bearish, support there may give in. If so, go short as the downside target of this breakout would be at 8 400c/share. Alternative scenario: Upside through 11 950c/share would trigger a neutral buying signal directed towards 13 170c/share – where positions should then be revised. Otherwise, stay long on continued upside through that level as gains to the all-time high at 15 580c/share could then ensue.