Shares surge despite profit warning due to outlays on new ventures |
New ventures will affect its bottom line
THE SHARES of financial services group Discovery surged 6.64 percent on Friday, despite the group warning that its profits for the year to end-June would decline by as much as 10 percent on the back of outlays in new ventures, particularly Discovery Bank.
The group’s bottom line was also adversely affected by a spike in large death claims in Discovery Life in the first half of the period under review.
Discovery said in a trading statement that it expected its normalised headline earnings per share to decrease by between 5 and 10 percent, compared to last year.
The company said that it planned to significantly increase investment in strategic initiatives, with the bulk of the investment expected to be directed towards the launch of the new Discovery Bank.
“This has necessitated a more detailed trading update for the year ended June 30, 2019,” the company said.
“For the first six months to December 31, 2018, this planned increased investment, together with an unexpected spike in large mortality claims within Discovery Life, resulted in a substantial reduction in normalised headline earnings per share,” its statement pointed out.
The group said its investment drive in strategic initiatives during the second half of the year were above the long-term level of 10 percent, compared with the previous year.
The group’s share price has come under intense pressure this year, having shed more than 27 percent to date.
Terence Craig, chief investment officer at Element Investment Managers, in a second quarter newsletter flagged Discovery as a potential future “fallen angel”, as its actuarial assumptions and accounting policies appeared to be bolstering its reported earnings, while the underlying cash returns appear to be materially worse and paint a different picture of the company.
Graig also took aim at Discovery Bank, saying it would take too long before the bank generated the required level of earnings, and that “there is at least an even chance that Discovery would destroy shareholder value in banking”.
In a major coup last month, Discovery appointed former deputy governor of the South African Reserve Bank Francois Groepe as the deputy chief executive of its banking unit, as the group readies itself to shake up the banking industry.
Discovery did not respond to questions on Element Investment Managers’ report.
However, the group in its trading statement said it is in good shape.
“Discovery is well positioned for growth through its robust established businesses, emerging businesses which are scaling and expected to grow strongly going forward, and significant new initiatives which are being built.
The company added that it did not expect the contentious National Health Insurance Bill to have a material long-term impact on its healthcare business.
Discovery was expected to release its results for the year to end June on Wednesday.
Discovery’s shares closed 6.64 percent up at R115.17 on Friday.