Wrap Text
Trading update and voluntary trading statement: six months ended 31 December 2018
DISCOVERY LIMITED
(Incorporated in the Republic of South Africa)
(Registration number: 1999/007789/06)
JSE share code: DSY, DSYBP
DSY ISIN: ZAE000022331
DSBP ISIN: ZAE000158564
JSE bond code: DSYI
("Discovery" or "the Company” or “the Group”)
TRADING UPDATE AND VOLUNTARY TRADING STATEMENT: SIX MONTHS ENDED 31 DECEMBER 2018
For its 2019 financial year, Discovery planned to increase investment into new strategic initiatives significantly, most
notably the build and launch of Discovery Bank, creating an expected reduction in Group earnings (1). This has
necessitated a more detailed trading update for the six months ended 31 December 2018.
For the six months ended 31 December 2018 (“current period”), Discovery’s normalised headline earnings per share
(undiluted) (2) is expected to decrease by approximately 16% to c366.6 cents (2017: 438.5 cents) compared to the prior
comparative period (“prior period”). As previously reported, spend on new businesses (3) increased significantly over the
period and will amount to approximately 21% of Group earnings (including 3% from the associated financing costs).
New business annualised premium income (“API”) is expected to grow by 16% while the Group’s financial leverage ratio
(“FLR”) is expected to improve to 25% and the central cash buffer to increase to R3.4bn.
The performance for the current period will reflect a manifestation of the planned investment into new businesses and
a strong operating performance from all of Discovery’s businesses, except Discovery Life, which experienced a spike in
large mortality claims amounting to approximately 8% of Group earnings for the six months. Discovery Life has altered
its reinsurance structures to ameliorate large-claim volatility going forward.
1) 21% of Group earnings spent on five key new businesses, most notably Discovery Bank
Discovery significantly increased its investment into new businesses and the income statement impact for the six months
is c21% of Group earnings. The most notable initiative is Discovery Bank, which was launched in November 2018 for beta
testing, and is expected to roll-out to the public in March 2019 - the cost incurred in the build, test and run phases of the
Bank have largely been in line with expectations. Discovery estimates a further R90m to be spent on build until the public
roll out and a further R180m on test and run. Other important new businesses include Vitality Invest, Vitality1 (the global
technology platform), Umbrella Funds and Discovery for Business - all with pleasing early receptivity. The spend on new
businesses is in line with budget and is fully provided for in the Group’s capital plan.
2) Operating performance
Summary of business performance for the current period compared to the prior period
Normalised profit from operations New business API
Discovery Health +10% +3%
Discovery Life (see note a) -13% +8%
Discovery Invest +9% +14%
VitalityHealth +26% +18%
VitalityLife +15% +8%
Discovery Insure (see note c) +114% +4%
Vitality Group +179% +36%
Ping An Health before tax (see note b) +26% +117%
21% of Group earnings
Investment in new businesses (allowing for financing costs) N/A
Discovery Group (Consolidated) -4% +16%
1 Normalised profit from operations
2 The percentage change in the current period is the same for both undiluted and diluted earnings per share
3 Excluding JV Card profits
The following items are worth noting in the table above:
a. Discovery Life experienced a spike in high-value mortality claims, which will reduce its operating profit by 18% and
is expected to negatively impact Group earnings by approximately 8%. While the cost of claims was within
premium loadings, they exceeded expectation. The skewness is demonstrated by the largest 4.5% of death claims
amounting to 38% of the total claims cost. Based on this, and similar volatility in previous periods, Discovery Life
has altered its reinsurance structures to ameliorate this volatility going forward. Other aspects of the business
performed well - Individual Life new business increased by 14%, and lapses and policy alterations performed in
line with expectation. Discovery Life generated strong cash flow, and in addition released R3.5bn of capital due to
the implementation of Solvency Assessment Management (“SAM”). Discovery Life is strongly capitalised for future
growth.
b. Ping An Health’s performance was exceptional, with new business increasing by c117% to R4.3bn (4) over the period,
and the business experiencing excellent underlying actuarial dynamics. Significant investment has been made in
its operational, technological and system capabilities to facilitate this growth. These investments have dampened
operating profit growth before tax to 26%, despite revenue growth of 84%. As the business scales and matures, it
is expected that operating margins will increase. The compound revenue growth rate over the past three years
has been 68% pa, reflecting the scale of the emerging health insurance market and success of Ping An Health’s
strategy. The extent of growth and spend on digitalisation and infrastructure has been validated post the reporting
period with Ping An Health attracting in excess of one million policies during January 2019.
c. As previously communicated in the SENS announcement of 20 December 2018, SoftBank Vision Fund invested
USD500m in Cambridge Mobile Telematics (“CMT”), an associate investment of Discovery and strategic partner
to Discovery Insure since 2014. The transaction will reduce Discovery’s effective shareholding in CMT to
approximately 10% on a fully diluted basis, and generate approximately USD55m (R780m) profit for Discovery.
The transaction was completed post the reporting period and will only be reflected in Discovery’s full year results.
3) Items impacting normalised headline earnings
Normalised profit from operations is expected to decrease by approximately 4% to cR3 799m (2017: R3 941m). The
difference between normalised profit from operations and normalised headline earnings was predominantly affected by
three aspects. As previously disclosed, an increase in borrowings has resulted in an increase in finance costs of R128m
over the prior period, mainly due to funding investment in new initiatives. In addition, equity and bond market movements
resulted in fair value losses of R116m on shareholder investments (which are now reported through profit or loss in terms
of the newly-adopted IFRS9). Lastly, the accounting treatment of the finance lease relating to Discovery’s head office (as
explained in previous announcements), had a further increased impact of R55m. Headline earnings per share (undiluted (2))
is expected to decrease by c18% to c347.4 cents (2017: 426.1 cents) and basic earnings per share (undiluted (2)) by c14% to
c352.7 cents (2017: 411.7 cents).
4) Prospects for growth
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 toward previous levels. Profit growth is expected to return to its stated goal of CPI plus 10% and
is well capitalised for its five-year planning horizon.
Discovery’s results for the six months ended 31 December 2018 are being finalised and are due to be released on SENS on
21 February 2019. This trading update covers some important elements of the expected results. Whilst Discovery has a
reasonable degree of certainty that the information contained in this update reflects the outcome for the six months
ended 31 December 2018, it is subject to final revision and approval. The financial information on which this trading
statement is based has not been reviewed and reported on by the Company’s external auditors.
Sandton
15 February 2019
Sponsor
RAND MERCHANT BANK (A division of FirstRand Bank Limited)
4 Ping An Health’s new business API at 100%
Date: 15/02/2019 09:39:00 Produced by the JSE SENS Department. The SENS service is an information dissemination service administered by the JSE Limited ('JSE').
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