Investors rushed to buy Discovery shares on Thursday, relieved that no imminent rights issue would dilute their stock and encouraged by the group’s emerging businesses, which finally looked near profitable.
Shares in Discovery rose as much as 7.92% to R127.99, despite the group missing earnings forecasts. The share price closed 4.35% higher at R124.70.
The share-price jump was partly a "relief rally", with shareholders pleased that no rights issue was announced to raise capital for new business funding, said analysts.
Delivering the group’s results for the six months to December 2016, CEO Adrian Gore said the group had more than R1bn to fund new business growth.
Spend on new initiatives fell 36% to R244m, accounting for 7% of operating profit, which rose 13% to R3.4bn.
The share was further buoyed by news that operating losses in emerging businesses — Ping An Health, Discovery Insure and the Vitality Group — were substantially lower.
"We hope these businesses will be profitable in the next six months," Gore said.
Discovery Insure would offer commercial insurance to small and medium-sized businesses, said CEO Anton Ossip. As with Discovery’s other businesses, the product would reward positive behaviour for sound risk management, he said.
Ping An Health posted an operating loss of R9m — an 88% improvement on the previous period. Profitability would depend on the quantum of growth and associated new business strain, Gore said.
"The Ping An Group’s intention is to build a considerable health business." Ping An Health has about 1-million clients.
China’s private health insurance market was expected to be a 1-trillion yuan ($145bn) industry by 2020, Gore said.
"Ping An Health, Discovery Insure and Vitality Group all look like they will turn the corner to profitability over the next few years…. These assets all have substantial potential in our estimation, particularly Ping An Health," said Justin Floor,
portfolio manager at Kagiso Asset Management.
Discovery would launch an umbrella fund in its Invest unit and expand into the UK investment market, said Gore.
It expected to launch its bank in 2018.
"Discovery’s impressive growth ambitions are cash-hungry and I would expect ongoing scrutiny around the balance sheet, which is looking increasingly stretched," commented Floor.
The groups’ embedded value was flat at R53.3bn, hurt by record low interest rates in the UK and the effect of the stronger rand on offshore earnings.
Low UK interest rates were the biggest risk facing the group, Gore said. If rates increased, Vitality UK would be significantly more profitable, he said.
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