Price discovery not exactly clear in Discovery’s case



Price discovery not exactly clear in Discovery’s case

Analysts can’t agree on how sustainable the company’s earnings are, or what its share price target should be

Giulietta Talevi

On the surface of it, Discovery’s results should have helped keep its buoyant share price afloat. After all, normalised headline earnings growth of 16% in a recession-hit SA is commendable.
But the market isn’t buying it.
In fact, of the analysts who formally cover Discovery as tracked by Bloomberg, there is rarely such wide dissent on what a company should be worth.
In the case of Renaissance Capital, for example, its target price on the share is R91 – implying a correction of as much as 45%. Avior, however, which rates the share an “outperform” has a 12-month target price of R258.74 – a potential gain of 54% from its present levels (the share closed at R167.56 on Wednesday).
Perhaps one of the issues for sceptics is that Discovery’s biggest profit generators are still almost entirely South African, and that the company’s expansion abroad is still mainly funded by its operations at home.
Its “emerging businesses” have turned profitable – making R158m in the year to June from a R170m loss last year.
But how sustainable Discovery’s rand earnings are, where not only is the economy contracting but the value of the currency too, must be a big question – particularly if those earnings are to support businesses in hard currency jurisdictions like the UK and US.
Another issue for some analysts is the difference between Discovery’s embedded value – now at R65.6bn, and its market capitalisation, at roughly R107bn. Its embedded value is essentially net asset value plus the present value of in-force business. The market is clearly expecting great things from Discovery’s emerging operations which may or may not materialise, suggesting that its share price is, in a word, stretched.

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