Discovery’s share price rallied to a 10-month high even after the insurer again withheld dividends as it continues to monitor the impact of Covid-19 lockdowns on its Chinese operations while pushing ahead with investment in new business initiatives.
The continuation of Discovery’s strategy of withholding dividends, which began with the arrival of Covid-19 in 2020, came after it said on Thursday that net profit attributable to shareholders fell 11% to R2.943bn in the six months to end-December 2022. Even so, the group’s share price still climbed as much as 4.4% to R148.56, the highest intraday level since May 5 2022, before paring gains to close at R145.35.
“It’s not the time to reinstate the dividend,” Discovery CEO Adrian Gore told investors during the group’s results presentation. “We’d like to wait and revisit that at year-end. We’re not an organisation that’s focused on the dividend — we’re focusing on growth.”
Discovery’s share price performance on Thursday was probably due to the solid performance of the bulk of its underlying business units during the half-year period. It also reported strong normalised interim earnings, an accounting measure that strips out the effect of seasonality and unusual one-time events.
Gore argues normalised earnings are a better indicator of Discovery’s underlying performance as this measure accounts for the influence of interest rates and currency hedges. For example, headline earnings per share (HEPS) fell 9% to 453.6c during the period, down from 499.1c in the corresponding period the prior year, a change the group largely attributed to interest rate fluctuations.
“The HEPS figure is completely influenced by the movements in interest rates and hedging instruments, so the normalisation effect has integrity,” said Gore. “If you look at the core operating profit the business had done remarkably well.”
Normalised headline earnings increased by 30% to R3.74bn in the half-year period, while core new business annualised premium income (API) increased by 7% to R11.2061bn. Income from non-insurance business lines rose 51% to R2.528bn.
“The results are robust,” said Gore. “All of the businesses are well positioned for future growth.”
Each of Discovery’s major regional business divisions delivered solid performances with SA’s normalised operating profit up 23% to R4.414bn. That was underpinned by good results from Discovery Life and Discovery Invest.
Discovery Health saw a modest rise in its normalised operating profit, while Discovery Bank reported a R398m loss as the group continues to invest in building up the fast-growing digital bank.
“We invested more than 20% of our operating profit in new initiatives, notably Discovery Bank,” said Gore.
Discovery Bank’s operating loss for the period was a 20% improvement on the previous half year, thanks to the strong growth in primary clients that now stand at 581,500 compared with 385,200 at end-December 2021. Retail deposits at end-December were up 33% at R12.7bn with the group saying Discovery Bank is still on track to have 1-million clients by 2026.
The group’s UK business grew normalised operating profit by 15% to R1.277bn with Vitality Life the star performer. Vitality Global’s normalised operating profit jumped 33% to R239m, though core new business based on API fell due to challenging conditions in China that affected Ping An Health Insurance (PAH).
Discovery’s 25% stake in PAH meant it was affected by the complex operating environment in China during the period as the country’s abandonment of its zero-Covid-19 policy resulted in a wave of new infections. New business acquisitions also suffered against a global economic backdrop that was negatively affected by the lingering effects of the pandemic, the war in Ukraine and spiralling inflation.
“This last six months really has been a remarkably complex period,” said Gore, who specifically mentioned load-shedding as an additional factor of concern in the SA market.
“It’s just continually complex and causal — one thing leads to another,” he said.
Though Discovery continues to invest in new initiatives, it is allocating slightly less capital to these new ventures, which include Amplify Health, its joint venture with Singapore-based AIA Group aimed at tapping into the high-growth Asian market. During the six-month period, Amplify Health continued to build its integrated health solutions for the Pan-Asian market and acquired AiDA Technologies, a leading provider of artificial intelligence (AI) solutions to companies across the Asia-Pacific region.
Gore said Amplify had “developed and identified” seven products it was set to roll out in the near future, including a smart claims platform and a chronic disease management platform. He also said he expected Amplify, in which Discovery took a 25% stake when it was started a year ago, to begin writing business this calendar year.
“I think that within this calendar year, we should be doing proper business with Amplify,” said Gore. “We’ve shifted all of our health IP into that business, which is considerable.”
Update: February 23 2023
This story has been updated with new information.
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