Un­der pres­sure

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.

Finweek English Edition - - MARKET PLACE - Ed­i­to­rial@fin­week.co.za Mox­ima Gama has been rated as one of the top five 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 t

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.

What next?

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.

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