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DISCOVERY LIMITED - Unaudited interim results and cash dividend declaration for the six months ended 31 December 2019

Release Date: 20/02/2020 08:00
Code(s): DSY DSBP DSY03 DSY01 DSY04 DSY02 DSY05     PDF:  
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Unaudited interim results and cash dividend declaration for the six months ended 31 December 2019

Discovery Limited
Unaudited interim results and cash dividend declaration for the six months ended 31 December 2019

JSE share code: DSY ISIN: ZAE000022331
JSE share code: DSBP ISIN: ZAE000158564
JSE bond code: DSYI

Discovery achieved the following results for the period ended 31 December 2019:
- Net asset value increased by R1 598 million
- Headline earnings per share decreased 10% to 311.7 cents per share
- Earnings per share decreased 12% to 310.3 cents per share
- Total new business API increased 17% to R11 116 million
- Normalised profit from operations decreased 7% to R3 551 million
- Profit for the year decreased 11% to R2 078 million
- Gross income of the Group increased 10% to R31 930 million
- Diluted embedded value per share increased 8% to R111.30 per share
- Interim ordinary share dividends remains unchanged at 101 cents per share

The information has been extracted from the unaudited results for the period ended 31 December 2019.

Robust performance in a complex period with substantial investment in new initiatives and core businesses performing well with the exception of VitalityLife

Financial performance

Over the six months ended 31 December 2019, all of Discovery's established and emerging businesses, with the exception of VitalityLife, produced robust operating
results. VitalityLife was largely impacted by its previously-announced strategic decision to mitigate its exposure to further interest rate declines in the United Kingdom.
In addition, the Group continued its increased investment into new strategic initiatives - with Discovery Bank, VitalityInvest and Vitality1 showing encouraging traction,
and spend fully provided for in the capital plan.

As a result, Discovery's normalised profit from operations decreased by 7% to R3 551 million, headline earnings decreased by 9% to R2 047 million and normalised
headline earnings decreased by 11% to R2 117 million. New business annualised premium income (API) increased by 17% to R11 116 million (and by 5% to R9 523
million excluding Vitality Group and the take-on of new closed medical schemes in Discovery Health).

Normalised profit from operations

                                                                                                                   Current period
                                                                                                      Current            compared
                                                                                                   period, in           to prior,
                                                                                                  ZAR million            % change

Discovery Health                                                                                        1 575                  +8
Discovery Life                                                                                          1 875                 +25
Discovery Invest                                                                                          485                  +7
Discovery Vitality                                                                                          5                 -75
Discovery Insure                                                                                           75                 +21
VitalityHealth                                                                                            495                 +11
VitalityLife                                                                                             (134)               -145
Vitality Group                                                                                            110                 +16
Ping An Health                                                                                             68                +467
Operating profit before investment in new initiatives                                                   4 554                  +5
Spend on new initiatives                                                                               (1 003)                +81
Operating profit after investment in new initiatives                                                    3 551                  -7

In terms of the operating model, the established businesses delivered a robust performance, with profit of R4 301 million, 3% higher than the prior period despite the
loss in VitalityLife. The emerging businesses grew strongly, delivering a combined profit of R253 million, 50% higher than the prior period. In addition, the Group
invested R1 003 million in new strategic initiatives, an increase of 81% over the prior period. Spend on new initiatives is weighted towards the first half of the year and
expected to decrease in the second half. Of this spend, 53% was dedicated to Discovery Bank, which is expected to remain the dominant investment going forward.
Performance of cash and capital metrics remained within guidance, with the Group's Financial Leverage Ratio at 24.3%(1) and the cash buffer at R2.5 billion.

1 Excludes capitalised lease liabilities under the newly adopted IFRS16 and bank borrowings related to normal course lending and borrowing activities.

Normalised headline earnings per share (diluted)(2) decreased by 12% to 322.3 cents and headline earnings per share (diluted)(2) decreased by 10% to 311.7 cents.

Ambition 2023 and Discovery's unique foundation

2 The percentage change in the current period is the same for both undiluted and diluted earnings per share.

As previously mentioned, Discovery has set a bold Ambition for 2023, of being a leading financial services organisation globally, positively influencing 100 million lives -
with 10 million directly insured - and being a powerful force for social good. Central to achieving this is Discovery's unique foundation - its core purpose, values, people
and brand, which all inform a recursive R&D agenda that continually refines the Shared-Value model.

Over the period, there was substantial advancement of the Group's R&D agenda, including ongoing development of Shared-Value capability across the Group (Vitality
Money, Active Rewards 2020); industry capability across silos (Bank, corporate productivity and Shared-Value health insurance) and across all aspects of Discovery's
value chain (Vitality D2C, Vitality Running World Cup).

The globalisation of Discovery's Vitality Shared-Value model is being enabled by Vitality1, the globally unified systems platform. Vitality1 is live in nine markets after 18
months of operating, touching two million members and creating efficiencies in rolling out in new markets. Every day the platform logs more than four million workouts
and allocates more than 35 000 rewards.

As mentioned previously, achieving the Ambition will require continued execution of market-specific strategies:

- South Africa: a disruptive composite model, with market-leading businesses and a successful entry into banking
- United Kingdom: a differentiated offering through a composite Vitality Shared-Value model
- Ping An Health: the leading health insurer in China with over 50 million clients
- Vitality Group: a sophisticated global behaviour-change platform linked to financial services

South Africa

Discovery Bank

During the period, focus was on leveraging key strategic advantages to build a retail-heavy bank of scale; demonstrating the efficacy of the Vitality Shared-Value model
in banking and creating an appealing customer proposition; using Discovery's unique data capability; and executing on a lower cost-to-income FinTech infrastructure
- ultimately ensuring the Bank is a composite maker for the Group.

As at 18 February 2020, Discovery Bank had 78 000 clients with 180 000 accounts, nearly half of which had never held a Discovery Card before; deposits had grown
strongly to R1.2 billion; total credit card spend was R2.6 billion and total credit limits granted was R2.5 billion - with over R1 billion in credit facility used. Early member
engagement is positive and the client base is exhibiting appealing spend, credit, arrears and deposit behaviour, better than the performance of the previous Discovery
Card and considerably better than the market. Growth potential is strong with over 200 000 accounts that still need to be migrated from the FNB Joint Venture; and the
activation of Discovery's advisor channels to sell bank accounts in the second half of the year.

Discovery Health

The strategic focus over the period was on sustaining growth in a contracting medical scheme market; managing medical inflation while optimising cost and quality;
reducing administration costs while maximising service; and ensuring the increasing financial strength and competitive position of Discovery Health Medical Scheme
(DHMS).

Discovery Health (DH) delivered a resilient performance, with normalised operating profit increasing by 8% to R1 575 million. Total new business API (including take-on
of new closed medical schemes) grew by 26% to R4 367 million.

New business API (excluding Vitality and the take-on of new closed medical schemes) was affected by the challenging economic environment and slower employment
growth, declining 4% relative to the prior period, though still robust at R3 289 million. Traditional new membership from employees joining DHMS employer group
clients, which has historically characterised DHMS growth, has retracted and is being replaced by individual members joining DHMS in their personal capacity; the ratio
of these sources of growth has thus inverted. DHMS delivered a strong performance, with a projected positive operating result before investment income, and solvency
of 27.3% for the scheme year ending 31 December 2019(3). The average contributions of DHMS are 16.7% lower than those of competitors per unit of healthcare
benefit.

3 Note that the DHMS results remain subject to finalisation through the annual independent audit currently underway

Discovery Life

The strategic focus over the period was on optimising growth and quality of new business; achieving positive operational experience variances; ensuring balance and
correct correlations within the Shared-Value model; and ensuring products have relevance through member value and engagement.

Discovery Life (DL) had an excellent period, growing earnings by 25% to R1 875 million (off a low base) as a result of improving claims experience and pleasing all-round
performance. New business grew 2% to R1 240 million in a declining market, resulting in over 31% market share in the retail affluent risk market - more than double
the next largest competitor. DL performed strongly against EV assumptions with improvement across all non-economic experience such as claims, lapses, policy
alterations and Vitality status experience, leading to a positive overall EV variance in Life and Invest. The business remains well capitalised with an above-target SCR
coverage of 172%, and generated cash in line with plan.

Discovery Invest

The strategic focus over the period was on growing new business and assets under management in a market attracting low inflows; evolving a unique long-term
Shared-Value model in a market experiencing commoditisation and market pressure; and ensuring superior overall financial outcomes for customers.

Discovery Invest's performance was robust in an environment of weakened inflows. Operating profit grew by 7% to R485 million and assets under administration by
16% to R96.7 billion, driven by improved market performance at the end of the period. Over 78% of linked funds were placed in Discovery funds. Net inflows were
strong relative to the industry at R2.3 billion. Sales were affected by the weak inflow environment, seeing new business (including ACIs) declining by 2% to R1 357
million. The Discovery Balanced Fund continued to perform well and was in the first performance quartile in its sector for three, five, and ten years(4). At the end of the
third quarter, Discovery Collective Investments was the sixth highest retail flow taker, excluding money market funds, with a substantial proportion of flows going to
high-margin business.

4 Per Morningstar at 31 December 2019.

Discovery Insure

The strategic focus over the period was on quality growth in the mass affluent space and ensuring the integrity of the Shared-Value model so that with duration - profit,
scale and materiality emerge.

Discovery Insure (DI) saw strong growth during the period, achieving R75 million operating profit - up 21% on the prior year. Gross Premium Income grew by 15% to
R1.8 billion while gross new business API grew by 7% to R551 million. Gross Written Premium (personal lines only) market share was estimated at 6%.

United Kingdom

The strategic focus over the period was on pursuing the composite strategy. For the six months, combined new business increased by 12% to £76.4 million (R1 416
million, up 14%) and total lives exceeded 1.29 million, an increase of 12%. Normalised operating profit for VitalityHealth (VH) and VitalityLife (VL) reduced by 52% to
£19.5 million (R361 million) - after the impact of interest rates and the interest rate hedge for VL. The hedged position provides a greater degree of certainty and
enables operating within risk tolerance levels.

VitalityHealth

The strategic focus over the period was on maintaining exceptional quality of new business; delivering personalised healthcare pathways through digital; and ensuring
service quality.

VitalityHealth continued to deliver strong results. Operating profit grew by 9% to £26.7 million (up 11% to R495 million), although new business declined by 2% to £33.1
million (0.5% to R613 million) in a challenging sales environment, characterised by economic uncertainty and aggressive competitor activity. Total lives reached 674 000,
up 12%, while earned premiums grew 9% to £246.5 million (R4 569 million). The results reflect continued strong performance across key business metrics: the lapse
rate and claims performance was stable and costs remained well managed.

VitalityLife

The strategic focus over the period was on stabilising the impact of external factors on the business; addressing non-economic variances through quality of new
business and retention; and right-sizing the business for the environment.

VL new business API grew by 6% to £34.8 million (8% to R646 million), and earned premiums by 12% to £141.4 million (R2 620 million). Lives covered and in-force
policies both grew strongly by 12%, exceeding 605 000 and 458 000 respectively. Operating profit declined to -£7.2 million (-R134 million). This includes a negative
impact of £16 million due to the hedge structure and related impacts, as well as negative lapse experience, resulting in embedded value reducing by 1%.

VitalityInvest

The strategic focus over the period was on new business growth and product development to support this. VitalityInvest (VI) has made substantial progress, with new
business annual premium equivalent (APE) of £8.5 million(5) (R157 million) over the period, equating to month-on-month growth of 17% and total funds under
management of £105.3 million (R1 952 million).

5 APE calculated as single/10 + annual recurring.

Ping An Health (PAH)

The strategic focus over the period was on delivering on PAH's ambition of being the leading health insurer in China; driving quality of new business; and continuing to
invest for growth and scale.

PAH had a remarkable period, with total revenue growing by 56% to RMB5.3 billion (R11.1 billion), and new business premium growing over 27% to RMB2.6 billion (R5.5
billion). PAH exceeded its written premium target of RMB10 billion for the 2019 calendar year. The Group's share of after-tax operating profit grew by 467% to $4.6
million (R68 million). The tax relief on deductible commissions effected in May 2019 resulted in the effective tax rate reducing to 41% for the period (December 2018:
55%).

Vitality Group

The strategic focus over the period was on pursuing global scale, relevance and materiality; ensuring leading IP, technology and data insights to deliver the best
behaviour-change platform and drive unique customer propositions; and having a transformational impact on the business of partners.

Vitality Group (VG) delivered a pleasing set of results for the period, achieving a profit of $7.5 million (R110 million, up 16% from the prior year). Fee income grew to $35
million (R515 million, up 17%), supported by strong growth in insurance partners' integrated premiums, which reached $591.5 million (R8.7 billion). Total Vitality
membership grew to 4.5 million, of which two million are administered on Vitality1. Membership(6) from insurance partners' integrated products grew to 1.8 million, an
increase of 63% on the prior year.

6 Full Vitality membership.

Priorities for growth

The Group is well positioned for growth over its planning horizon to 2023, with the capital plan intact. Key priority areas are:

1. Execute on VitalityLife's stated plans to manage in the low interest rate environment, stabilise experience variances and return to robust profit in FY 2021
2. Achieve significant traction in new initiatives, most notably Discovery Bank, and ensure short-term new business thresholds are achieved for each initiative
3. Ensure the established businesses retain their insurgency
4. Capitalise on emerging businesses' unique attributes and positioning to achieve scale and materiality

Full announcement

The contents of this short form announcement are the responsibility of the Board of Directors of the Company (Board).

Shareholders are advised that this short form announcement represents a summary of the information contained in the full announcement, published
on the Stock Exchange News Service (SENS) at https://senspdf.jse.co.za/documents/2020/JSE/ISSE/DSY/H12020.pdf and on Discovery's website (www.discovery.co.za/corporate/investor-relations). Any investment decisions by
investors and/or shareholders should be based on a consideration of the full announcement as a whole and shareholders are encouraged to review the full announcement.

The full announcement is also available for inspection, at no charge, at the registered office of the Company (1 Discovery Place, Sandton) and at the offices of
Discovery's sponsors, Rand Merchant Bank (a division of FirstRand Bank Limited) (1 Merchant Place, Corner Fredman Drive and Rivonia Road, Sandton) from 09:00 to
16:00 weekdays. Investors and/or shareholders may request copies of the full announcement from the Company Secretary.

Dividend and capital

Final dividends paid in respect of the 2019 financial year

The following final dividends were paid during the current period:

- B preference share dividend of 508.28767 cents per share (406.63014 cents net of dividend withholding tax), paid on 23 September 2019.
- Ordinary share dividend of 114 cents per share (91.2 cents net of dividend withholding tax), paid on 7 October 2019.

Interim dividend declaration in respect of the 2020 financial year

B preference share cash dividend declaration:

On 14 February 2020 the directors declared an interim gross cash dividend of 505.41097 cents (404.32878 cents net of dividend withholding tax) per B preference share
for the period 1 July 2019 to 31 December 2019, payable from the income reserves of the Company. A dividend withholding tax of 20% will be applicable to all
shareholders who are not exempt.

The issued preference share capital at the declaration date is 8 million B preference shares.

The salient dates for the dividend will be as follows:

Last day of trade to receive a dividend           Tuesday, 10 March 2020
Shares commence trading "ex" dividend             Wednesday, 11 March 2020
Record date                                       Friday, 13 March 2020
Payment date                                      Monday, 16 March 2020

B preference share certificates may not be dematerialised or rematerialised between Wednesday, 11 March 2020 and Friday, 13 March 2020, both days inclusive.

Ordinary share cash dividend declaration:

Notice is hereby given that the directors have declared an interim gross cash dividend of 101 cents (80.8 cents net of dividend withholding tax) per ordinary share, out
of income reserves for the six month period ended 31 December 2019. A dividend withholding tax of 20% will be applicable to all shareholders who are not exempt.
The issued ordinary share capital at the declaration date is 658 290 736 ordinary shares.

The salient dates for the dividend will be as follows:

Last day of trade to receive a dividend           Tuesday, 17 March 2020
Shares commence trading "ex" dividend             Wednesday, 18 March 2020
Record date                                       Friday, 20 March 2020
Payment date                                      Monday, 23 March 2020

Share certificates may not be dematerialised or rematerialised between Wednesday, 18 March 2020 and Friday, 20 March 2020, both days inclusive.

Transfer secretaries

Computershare Investor Services Pty Limited (Registration number 2004/003647/07) Rosebank Towers, 15 Biermann Avenue, Rosebank 2196, PO Box 61051,
Marshalltown 2107

Sponsors Rand Merchant Bank (A division of FirstRand Bank Limited)

Secretary and registered office MJ Botha, Discovery Limited (Incorporated in the Republic of South Africa) (Registration number: 1999/007789/06)

Company tax reference number: 9652/003/71/7 JSE share code: DSY ISIN: ZAE000022331 JSE share code: DSBP ISIN: ZAE000158564  JSE bond code: DSYI
1 Discovery Place, Sandton 2146 PO Box 786722, Sandton 2146 Tel: (011) 529 2888 Fax: (011) 539 8003

Directors ME Tucker (UK) (Chairperson), A Gore* (Chief Executive Officer), HL Bosman, Dr BA Brink, SE de Bruyn, R Farber, HD Kallner*, F Khanyile, NS Koopowitz*, D
Macready(1), Dr TV Maphai, HP Mayers(2), Dr A Ntsaluba*, AL Owen (UK)(3), A Pollard*, B Swartzberg*, DM Viljoen* (Financial Director), SV Zilwa

* Executive.
1 Appointed effective 3 February 2020.
2 Redesignated as a non-executive director effective 28 November 2019.
3 Retired effective 14 February 2020.

Notes to analysts:
- Any forecast financial information contained in this announcement has not been reviewed or reported on by the company's external auditors.
- Discovery has published supplemental unaudited information on the website. For this and other results information,
  go to https://www.discovery.co.za/corporate/investor-relations and page down to Financial results and reports, Interim Results 2020.

SENS release date: 20 February 2020

Date: 20-02-2020 08:00:00
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