Discovery banking on more healthy growth
But is it biting off more than it can chew as it diversifies?
● When CEO Adrian Gore takes to the podium on Tuesday to present Discovery’s interim results, investors will be scrutinising the company’s performance with some asking whether it can afford to continue its upward growth trajectory.
Headquartered in Johannesburg, Discovery has expanded its operations in the UK, US, China, Singapore and Australia. It recently partnered with insurers Generali in Europe and John Hancock in the US, promising to take its shared-value business model to these markets. Back home, it is very soon launching Discovery Bank.
So pressure is mounting on the company to prove that its efforts to diversify the business on foreign soil are paying off.
Abri du Plessis, a portfolio manager at Gryphon Asset management, said investors would be inspecting Discovery’s results to ensure the “company is doing what everyone is expecting”. Following the meltdown of multinational retailer Steinhoff in December, many growth-focused South African businesses may feel they are operating in a climate of scepticism.
Byron Lotter, a portfolio manager at Vestact Asset Management, said while Steinhoff was a wake-up call to businesses and investors alike, it was a once-in-a-generation occurrence, and not applicable to Discovery.
Recently, when speculation suggested that Discovery could be the target of a report by short-seller Viceroy Research, Gore was identified as a powerful and charismatic CEO, like Steinhoff's Markus Jooste. But Lotter said the two men were not comparable.
But more frequent updates on the company’s Chinese and US operations were needed, he added.
“They often speak about the potential in these markets rather than how they are actually faring and it is hard to distinguish how some of its John Hancock products work.”
The company’s global Vitality membership base now exceeds three million.
What may weigh more heavily on Gore’s mind is the success of the bank, even though it is tipped to disrupt this competitive sector with Discovery’s shared-value model that could reward clients for healthy financial decisions through its Vitality programme.
The bank’s systems are up and running, say industry insiders, who expect it to be launched in April. Discovery has confirmed its planned launch for the second quarter of the year, but beyond that Gore has remained tight-lipped about its offering.
More certainty around the bank’s value proposition may help to reassure investors, but it’s difficult to say whether this will materialise this week.
Though media reports have speculated that Discovery’s model will be based on branchless transactional banking to the affluent market, details may only be forthcoming when its banking licence is approved by competition authorities.
Having a shareholder such as Rand Merchant Investment Holdings would ensure Discovery did not bite off more than it could chew, Du Plessis said, and its backing might also help allay fears that Discovery cannot afford to capitalise its bank.
It had already raised R5-billion in a rights issue to fund its bank and UK expansion.
How much RMI could spend on Discovery’s bank after buying into UK-based insurer Hastings last year is not clear, but some analysts argue the bank will pay for itself.
Discovery’s credit card book, which it is buying from FNB owner FirstRand, generates about R350-million per year in pre-tax profits. The credit card book will also come with its statutory capital of about R600-million.
Customer deposits are expected to be the bank’s primary funding mechanism. With the bank not expected to be capital-intensive in its start-up phase, this could be all Discovery needs to get it off the ground.
With Discovery’s shares having been a stellar performer for a number of years, some of the company’s critics have asked whether the stock is too expensive. Since 2012 the share has risen 182%, compared with Old Mutual’s 51%.
On Thursday Discovery’s share price rose 9% following a trading update that showed a lower effective tax rate had helped drive an expected increase in headline earnings per share of between 33% to 38% for the second half of the year ending in December.
Lotter said he believed Discovery offered something truly unique and that one paid for its potential earnings.
In entering the banking sector, Discovery will be doing what it does best, starting new
businesses.
Though it took six years, its life insurer is now profitable. It reported 31% premium growth in the last financial year in a tough industry.
With the South African market upbeat as newly elected President Cyril Ramaphosa is expected to steer the country towards a wave of prosperity, Discovery and other South African businesses may find that the rising tide will lift all ships.
Warwick Bam, an analyst at Avior Capital Markets, believes increasing positive business and consumer sentiment will allow new banking products in Discovery’s portfolio to help grow its new business overall.
Its integration of health and behavioural data, which is rapidly evolving, will drive Discovery’s next wave of growth, he says.
When asked whether he was concerned that Discovery did not allow for questions after its results presentations, Lotter said: “In the early days he (Gore) took questions but these days they’ve become so popular that they fill out an entire hall of analysts. You get some grumpy old men asking the same questions so I expect the questions were cut to save everyone time.”
But Gore “is always accessible around results time”.
They speak about the potential in these markets rather than how they are faring Byron Lotter Portfolio manager at Vestact Asset Management