Discovery Ltd share price looks past declining earnings

Discovery Ltd released its results for the six months ended 31 December 2018. The period showed impressive growth with a temporary decline in bottom line profits due to considerable spend on new strategic investments, most notably the investment into the completion and launch of Discovery Bank. As a result, headline earnings and profits naturally decreased for the period. Group spend on new initiatives represented 21% of earnings into five new businesses as planned. The spend was fully accounted for in the capital budget and forms part of the five-year planning horizon.

Salient Features

• Group spend on new initiatives increased significantly to 21% of earnings as part of the planned investment in five new businesses. This spend is fully provided for in the capital plan, but impacted reported growth rates.
• Net insurance premium revenue up 19% to R18 560 million
• Profit from operations decreased 4% to R3 799 million.
• Headline earnings decreased 16% to R2 376 million.
• Headline earnings per share decreased 16% to 366.6 cents.
• Core new business sales up 16% to R9 049 million.
• Gross inflows under management up 11% to R67 541 million.
• Embedded value up 13% to R68 025 million.
• All Discovery’s businesses had a strong operating performance.

Gross Inflows Under Management

Measures the total funds collected by Discovery. Increased 11% for the six months ended 31 December 2018 compared to the same period in the prior year.

The Vitality model is a market disruptor and has now expanded globally. Discovery Health now us 3.2 million lives under administration, with strong vitality penetration rates of 53% providing highly generative cash flow streams. Discovery is investing largely in new strategic initiatives both locally and internationally. These include investments into new ventures overseas, short term insurance and a stand-alone banking operation in South Africa.

Discovery Life continued to perform well in new business sales and grow its market share in its target market, despite a spike in large mortality claims and its reinsurance structures have been altered to ameliorate large claims volatility going forward.

Vitality Group, the business responsible for international expansion of Shared-Value Insurance, made excellent progress over the period by adding Sumitomo Life Vitality and AIA South Korea on its Vitality1 Platform, concluding a number of new partner opportunities and seeing strong growth in the more mature markets.

The Discovery Bank test phase started in November 2018 and the phased public rollout is expected to commence in March 2019. Discovery Bank has finalised its restructure and new acquisitions and now owns 100% economic interest in the Discovery Card Join Venture, receiving 100% of the Discovery Card JV results.

Discovery's established businesses are well positioned for growth, with Discovery Life expected to revert to target growth levels. Similarly, Discovery's emerging businesses are expected to grow strongly going forward. Discovery's new businesses will require investment through their start-up phase, however, the 21% spend on new businesses is expected to decrease over the next few years towards previous levels. Profit growth is expected to return to its stated goal of CPI plus 10% and the business is well capitalised for its five-year planning horizon.

Analysis compiled by Tyron Searle, Trading Services, IG South Africa.