Discovery back on track
INTERIM DIVIDEND: VALUE FALLS SHORT OF ANALYSTS’ EXPECTATIONS ‘It took longer because its cashflow profile is lower than its peers.’
The heavy lifting has been done
Discovery declared an interim dividend of 65 cents per share on Wednesday for the first time since the Covid pandemic hit in 2020. The group’s headline earnings for the half year ended December were largely unchanged at R3.2 billion. This was not surprising, given the company flagged a relatively flat performance in a voluntary trading statement on Monday, which saw its share price sliding seven percent on the day.
Its share price recovered some losses on Tuesday (up over three percent) and closed 0.64% down on Wednesday following the release of its interim results.
The group has businesses in wellness, health care, life assurance, short-term insurance, banking and savings in South Africa, and has operations through its Vitality model in more than 40 markets worldwide.
Despite Discovery reinstating its interim dividends, Denker Capital equity analyst Barry de Kock said the value of the dividend as well as earnings fell short of analysts’ expectations.
De Kock said Discovery is a growth-focused company and in the last few years the group has held back on dividends.
“It took them a lot longer to get back to paying dividends, which also speaks to the cashflow profile of the group, which is lower than its peers,” he added.
In a statement announcing its results for the half year, Discovery said its banking business had achieved its stated target of “monthly operational break-even before acquisition costs” during the reporting period.
Its operating loss before new business acquisition costs improved by 40% and the bank had more than 825 000 clients as of December.
Discovery launched its bank in July 2019.
De Kock said Discovery seems satisfied its banking business is achieving targets quicker than previously envisioned. Forecasts for breaking even is late 2024 to early 2025.
“In general, it looks like the bank is gaining traction quite quickly and there’s good diversification between interest and non-interest revenue.” It is, however, early days, notes De Kock.
“It’s easy to grow the bank quickly … but the costs [can] come back to bite you later in the form of bad debt, even though Discovery Bank says its client base has a better credit profile and is regarded as low risk.
“Having said that, the costs to build out the bank’s credit capabilities won’t be repeated... The heavy lifting has been done.”
Overall, Discovery’s South African operations, which also include health, insurance and life cover, showed a nine percent increase in normalised operating profit.
Discovery Health has increased its new business by 52%, partly because of the take-on of closed medical scheme Sasolmed.
Discovery Insure’s profit recovery was hindered by two severe weather events in the second half of last year.
The group regards Vitality Global as a key growth enabler. Its partnership with Chinese insurer Ping An, in which Discovery has a 25% stake, is cash-generating, according to the statement.
CEO Adrian Gore said in an environment characterised by continued macroeconomic complexities, Discovery delivered a strong operational performance.