Discovery makes a great big profitable toast to your health
Homegrown champ hasn’t run out of international road
Discovery results presentations are always an “event”, with analysts constantly debating afterwards as to how good the company really is, as it continues to weave a web that draws people into its multidimensional models of intertwined offerings.
Despite being of a very functional design, this time I overheard murmurings about “New Head Office Syndrome” from the older attendees. These sceptics can list several such disasters, for example the late lamented Premier Group’s precipitous earnings decline that came in the wake of the opening of its new head office in Killarney in the 1980s.
And there were many who were disappointed not to hear more about the much-anticipated bank that will now only “be launched during 2018”, with no specific timeframe attached to its opening. Kicking off a new bank, where deposits will be taken from the public, is a naturally long and time-consuming process. Discovery’s banking licence was granted in October 2017 and live testing with Discovery staff is already taking place. Total spend on the project so far is R1.2-billion and this is expected to increase to R1.5-billion by time of launch.
There were no real surprises, good or bad, in the latest interim results to December 2017. Normalised operating profit grew by 19% comparatively. Within that broad figure, the group of established businesses (Health, Life, Invest, Vitality, Card, Vitality Health Insurance and Vitality Life Insurance) grew operating profit by 15%. The group of emerging businesses, which include Insurance and Ping An, saw profit rise by 151%, and all of its segments are now profitable.New business growth at Discovery Invest was disappointing, declining by 5% to R1.2-billion. Its assets under administration grew by 22% to R77.8-billion during the period. This segment has been an astonishing performer, considering it is only around a decade in the market.
There was a 4% decline in new business at Vitality Life Insurance, which has reconfigured and priced its business model for a low-interest environment in the UK. Although rates in that jurisdiction may begin rising this year, the trajectory is likely to be extremely shallow.
The group is highly focused on fraud detection models and machine learning. While 99% of clients are honest about their physical activity, 3,000 Discovery Life Gold clients were confirmed to be fraudulent during the latest interim period.
As far as device models such as wearables are concerned, over 500 million exercise readings were taken. Unusual workout signatures, such as heart rate, steps, calories and peaks, over multiple clients, were identified. Five million biometric readings by over 10,000 healthcare professionals were examined to identify atypical readings. The message is simple: Play the game, as you’re not fooling anyone but yourself. And the chance of getting caught when indulging in fraudulent activity is high.
The dividend yield is just above 1% and, using a typically Discovery-precise methodology that looks at profit contributions from established, emerging and new businesses, and over appropriate time periods, management says that “a four times dividend cover seems reasonable and natural”.
The group is well on its way to achieving its 2018 ambition. Setting a five-year ambition strategy, in 2013, its operating profit was R2.4-billion, new business totalled R5.9-billion and the group was represented in five countries. By the end of the 2018 financial year, that ambition should be reflected in R4.1-billion of operating profit, R9.7-billion of new business and representation in 19 countries.
On a roughly 20 times PE ratio, Discovery is not cheap. But this is a homegrown South African success story that is continuously adapting its offerings and succeeding, not just locally but in many different countries. In previous years, analysts were bemoaning that Discovery had surely run out of road – but borrowing from Roman philosopher Pliny the Elder and his quote on Africa: “Ex Discovery semper aliquid novi” (Out of Discovery, always something new).
Chris Gilmour is an investment analyst.