Discovery vulnerable to foreign ventures
JSE-listed health insurer Discovery Holdings’ international ventures will be in the spotlight when they make an expected appearance amid China’s economic plight with the release of its annual results this week.
The South Africa-based insurance company, which has a market capitalisation of R84-billion, delved into new international markets this year, adding China, one of the world’s strongest, yet volatile, economies to its portfolio.
Discovery’s investments in China and the US have analysts feeling pessimistic about the company’s fast-profit recognition, which leaves it vulnerable to the impact of the global economy.
According to July 29 data released by Paul Formanko of the JP Morgan group, Discovery’s adjusted full-year earnings per share are expected to stand at 670.71c, a 84.38c advance from the previous 586.33c, while fullyear headline earnings per share are estimated at 677.41c, an increase from 595.98c.
Chris Gilmour, an investment analyst at Barclays Africa Group, said the health insurer was “highly innovative” as it “defies the traditional way of doing business in the insurance sector”. Gilmour said Discovery’s Vitality business had been the core business driver, an “enabler” for binding the company together.
Vitality was launched two decades ago as part of Discovery’s commitment to health promotion and wellbeing programmes.
It opened its operations in the US two years ago after a partnership with John Hancock Insurance which exceeded the 750 000-member milestone, according to a statement released by the company last month.
In the statement, Vitality Group CEO Alan Pollard said: “We are well positioned to continue developing the most actuarially sound and effective wellness programme to help our clients have healthy and productive employees.”
However, despite the company’s excellent earnings record, it faces several challenges.
The South African stock was rated “underweight” by two of seven Bloomberg analysts, who accounted for the risks in its offshore expansion and the pressure on the rand, which dropped to R14/$, a record low.
According to Bloomberg data, 57.1% of analysts recommended selling the stock.
Singa Gungqisa, an analyst at Vunani Private Clients, said: “Most of the downgrades are probably standing on the fact that Discovery’s net source of growth is outside South Africa . . . and those geographical economies are not releasing great economic data points, so there’s bearishness based on that.
“Also, their debt is denominated in US dollars and the rand is weakening at the moment, which is making their
In Africa, you have to have operated for a while to source the right data
interest obligations higher than they should be.”
The company’s Africa expansion plan is likely to happen, but will be driven by a slow growth model to ensure that it is shielded from the risks of investing in African markets. “In Africa, you have to have operated for a while to source the right kind of data and be able to profile the risks of your clients,” said Gungqisa, who counted on Discovery’s ability to price risk correctly.
“They will probably be looking to partner with an institution that will have those sort of operational synergies which are leaning towards technology, so they can be able to plant their model swiftly.”
The company’s share price declined 3.7% to close at R129.05 on the JSE on Tuesday.