Building a Discovery empire
The health and insurance units remain stalwarts for now, but analysts expect dramatic changes in future
Despite the horror of Discovery’s Covid numbers — 5,711 group members and 12 employees have died, and R4.3bn in claims has been paid out — the group has had a startlingly good run on the JSE in the past month.
The fast-growing financial conglomerate’s shares rallied almost 17% in February; over one year the stock has gained almost 57%.
That’s not to say it hasn’t been a desperately tough time to operate as a health and life insurer, at least in human terms.
“The second wave after the December holidays in SA was more serious than the first, with deaths from our life and health clients up 24%,” says CEO Adrian Gore.
The shift to more infections in young people after post-matric events was a major contributor to
the severity of the second wave, he says.
“So it is critical to avoid gatherings during the Easter holidays. If there are superspreader events over Easter there could be 92,500 deaths, and even with a vaccine rollout it could still be … 44,400.”
Interestingly, however, Discovery’s data suggests that the reinfection risk in SA is “very low”, with only 28% of people vulnerable.
It’s also of the view that half of SA has already had Covid.
In spite of the extra spending because of the pandemic, the Discovery Health Medical Scheme suspended its premium increases, which normally happen in December, until
July 2021.
But the health business still grew operating profit 6% to R1.67bn for the six months ended December. It even reduced its lapse rate from 5.57% to 5.19%.
Still, Hylton Kallner, chair of Discovery SA, says that winning new business has been tough. While Discovery now has 57% of the open medical scheme market, income from new employees of existing clients has fallen 21%.
Discovery Life remained the largest contributor to group earnings at R1.9bn, though cash flow remains a modest R231m as almost all the capital is reinvested in new business.
Covid deaths were unexpectedly high in January and Discovery Life added R153m in provisions to the R3.4bn group Covid reserves.
Overall, Discovery’s normalised operating profit rose 19% for the period, though headline earnings per share fell 10%.
As always, Discovery’s results require a PhD in actuarial science, partly thanks to the interest rate and currency hedges the group has in place to “derisk” its international expansion. Only, this time the stronger rand caused it to book forex losses of R362m during the period.
Discovery’s cash flow is of perennial concern to analysts, but Justin Floor, portfolio manager at PSG Asset Management, believes that Discovery could improve its cash flow substantially in the short term.
“If it decided to slow down growth at Discovery Life it could generate at least a further R2bn in cash,” he says. “But as long as it is writing business at a higher margin than the rest of the industry, it makes no sense to cut back on sales.” It doesn’t look as though Discovery will take its foot off the brake, either.
Gore says its ambition for 2023 is to become a leading financial services group globally, positively influencing 100million lives with 10-million directly insured by the group.
Floor believes that Discovery has an unusually strong growth profile, and there will be a sharp reduction in costs as new businesses such as Discovery Bank, become profitable.
He argues that the mature SA health administration and the life insurance business will account for a smaller proportion of the business every year.
“There is plenty of runway for Discovery Insure, in which earnings grew by 43% to a still modest R107m, and the UK life and health businesses, operating in a much larger economy than SA, are now touching a R1bn in profit after 56% growth. And it is debatable what we are paying as shareholders for the bank.”
Kallner, who is also CEO of Discovery Bank, says he is confident that the bank can break even with 600,000 clients, from 298,000 now.
He says that as a digital bank it is fully scalable: costs will increase marginally even as the bank doubles in size.
Clearly, the bank is winning over a pretty flush clientele: it has R5.7bn of deposits, growing by R1bn a month.
With a conservative R3.8bn in advances to customers, the bank has a conservative balance sheet with 69% lower arrears than the rest of the sector.
The allure of the bank is that it has strong synergies with other businesses in the group.
For instance, there are extra points for clients who make use of all three Vitality divisions — health, drive and money.
All three contribute to Discovery’s in-house currency, Discovery Miles, which customers can use for flights, airtime and even electricity.
“The bank rounds off our proposition, and we are already a large player in insurance in SA. But we have no plans to set up a global retail bank,” says Kallner.
Other new businesses include the UK investment platform VitalityInvest and the umbrella pension fund business in SA, which offers fund
ý For the best part of three years, Grindrod Shipping has been in the doldrums — or at least lost.
Instead, the market was on the lookout for value opportunities at its more illustrious corporate cousin, Grindrod Ltd.
The old Grindrod group was split in mid2018, and the shipping group — which initially traded at R195 — was mostly a sinking story.
While Grindrod Ltd’s ports and terminals operations still hold market interests (in conjunction with a much-anticipated sale of noncore assets), Grindrod Shipping has drifted off most investors’ radars.
The shares sank as low as R38 in the wake of Covid-19 in May 2020, when the once mighty Grindrod Shipping carried a market capitalisation of just R720m.
But in the past few months, Grindrod Shipping has started to steam again.
The share has gained a whopping 55% over six months, and shown a nifty 27% appreciation over the past month.
At first glance, the recently released profit figures for the year ended December 2020, which reflected a loss of $38.8m, don’t appear too inspiring.
But the rate cards for the shipping industry — or time charter equivalent (TCE) — have firmed markedly in the first two months of 2021.
At this early juncture, it seems reasonable to pencil in a considerable lift in profit for Grindrod Shipping in the first half to end-June, and probably — considering an inclination to lock in the higher rates by fixing pricing structures — a robust performance for the full financial year.
Grindrod Shipping’s presentation conveniently shows the TCE achieved in the second half of 2020.
In the considerably larger dry bulk division, the daily average TCE for the handysize shipping category was $7,535, and $10,887 for the supramax/ultramax segment.
But the outlook changes fairly dramatically at the start of the new financial year.
Grindrod CEO Martyn Wade disclosed that on the dry bulk side, the average TCE was $10,545 a day and $12,540 for the supramax/ultramax fleet.
That represents an increase in TCE of about 40% and 15% respectively.
On the tanker side, as of February Grindrod Shipping has contracted about 165 operating days at an average daily TCE of $11,757. Grindrod only has two medium-range tankers and one small tanker — but costs will fall away meaningfully this financial year as its Doric Breeze is back in the fleet and there will be no more long-term charter-in costs in the tanker segment.
Wade said the dry cargo market appeared to have bottomed around late April/early May (when Grindrod Shipping shares plunged under R40), driven by strong Chinese stimulus measures and helped by many world economies emerging from lockdowns.
He noted that dry bulk freight rates have rallied in 2021 and were “off to one of the best starts in over a decade”— adding that the traditional Chinese New Year slowdown has been more muted this year, coupled with the global economy recovering from Covid’s demand destruction.
What’s more, this strong start has been supported by rebounding commodity demand and prices in the first two months of 2021 across a wide swathe of commodities like grains, iron ore and coal.
And if shareholders need more wind in their
Woolworths is getting its businesses in Australia to stand up independently, but there’s still no clarity as to whether David Jones is a keeper.
“It would be remiss of me not to consider all options available to us,” says Woolworths CEO Roy Bagattini, who had two major fixes on his hands when he took over a year ago: transform the SA fashion business and sort out Australian department store chain David Jones.
The food and clothing retailer is making strides in both areas.
In SA, it’s reconfiguring the fashion offering by increasing its exposure to casualwear in men’s and women’s wear as well as athleisure, while reducing formal wear and exiting privatelabel brands such as Studio W and the W Collection. Woolworths was overexposed to formal wear for starters, which has hurt the retailer as former office workers took to their tracksuits, working from home.
The closure of Studio W and the W Collection should also lead to a drop in the level of markdowns.
Bagattini tells the FM that Woolworths has rolled out athleisure to 80 stores so far. It also plans to bring in complementary brands that are local or international.
“We’re not becoming a department store. It’s not significant but they do legitimise the offering,” says Bagattini, referring to subcategories such as denim, which raises the question as to whether this would involve
Levi Strauss, where he worked before coming to run Woolworths.
It’s a strategy not unlike the approach in food several years ago, where particular national brands were added to the predominantly private-label portfolio.
But Woolworths isn’t going to opt for a high-fashion, fast-fashion route either.
“The starting point is to be clear on who we are and what we stand for in the apparel space,” says Manie Maritz, who took over as MD of Woolworths fashion, beauty and home in June last year.
“At times we’ve deviated from our DNA because, to be frank, we haven’t anchored ourselves in a deep understanding of our customers — their motivations, their behaviour.”
Maritz says the inconsistent performance in fashion, beauty and home was due to a combination of poor execution and strategy, adding that Woolworths’ fashion offering left customers confused, causing many to leave the brand.
For now, though, Woolies is more likely to lose customers than gain them, though Maritz says the group experienced a relatively better performance in
November and
December.
But, he says,
“it’s too early to