Thursday, 01 September 2011 - 20:00
Discovery releases annual results
Discovery is a company known in South Africa for its health and risk financial products. The company was founded by its ceo, Adrian Gore, now 46, in 1992. Year on year it continues to impress the market with its innovation and with its financial performance.
In a trading statement issued on the 24 August, the company said that normalised headline earnings were expected to increase by between 25% and 35% over the previous year.
The June 2011 results revealed an increase of 31% to 365,8 cents per share. The consensus forecast has this increasing to 431c next year, putting the current price on a forward PE (price to earnings) of 9,1 times.
The company has calculated an embedded value – the equivalent to the net asset value – at R48,45/ share up 19% year on year. The share price is trading at R39,15 and therefore a discount. The price did trade over R40 at the end of 2011, but has largely moved sideways for 2011 in line with the overall market.
The business has the health and life as the key profit generators, while at the same time it is expanding into new areas including Discovery Invest, Insure, Prudential joint ventures and its Vitality business.
• Discovery Health grew operating profits by 14% to R1,35 billion and with total medical scheme membership increasing by 6% to 2,5 million lives.
• Discovery Life has been an excellent business unit, with profits increasing by 16% to R1,6 billion
• Discovery Invest is a relative new business unit, but has turned into profitability generating R101 million with assets under management exceeding R17,2 billion.
PruHealth is Discovery’s joint venture business in the UK. During the year it acquired Standard Life Healthcare, the UK’s fourth largest assurer. By contributing this to the joint venture, Discovery’s stake has increased in both PruHealth and PruProtect from 50% to 75%.
Discovery has a joint venture in China called Ping An Health. Although still very early, this company administers a total of 300 000 lives.
The company remains on a definite growth path with the following major acquisitions and new launches:
• At the beginning of the financial year, Discovery acquired Standard Life Healthcare.
The company mentioned that its Vitality is the underpin to Discovery’s performance, saying that with Vitality they can make better selection, more accurate pricing, etc., which assists with the product development. The model is being used for the new Discovery Insure, where they will apply the principles of behavioural economics to the science of driving and linking this with premiums.
Discovery had the early backing of the RMB group. With the more recent restructuring of the Momentum group and the separation of FirstRand, the company RMI Holdings was listed on the JSE on the 7 March 2011. This company owns 25% of Discovery, 24,4% of the new MMI Holdings (merger of Momentum and Metropolitan) and 83% of Outsurance. This is a way to access 3 life businesses through one share.
This is definitely a growth business, but remains a complex business with many moving parts. At face value it does appear to be good value. On a dividend yield basis it however trades at a premium to the market. The market did appreciate the results, taking the price up over 3% higher towards the end of the day.
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