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    Discovery Results

    In a tough operating environment for financial companies Discovery has been able to release some excellent results. In a very short time Discovery has been able to grow an incredibly strong brand and is locally known mainly for their Discovery Health and Discovery Life operations. In addition to these two operations they have Discovery Vitality and Discovery Invest, and then PruHealth and PruProtect offshore.

    Some of the highlights from Discovery’s annual report include:
    • Operating profit up 32% to R1.7bn.
    • New business growth of 20%.
    • Diluted embedded value per share up 12% to R35.83.
    • An increase of 31% in the dividend to 58.5c.

    This is clearly a company that has been able to grow despite operating in a tough sector in tough economic times.

    On the face of it Discovery has been able to build such a strong company over such a short period as they have come into the market with new, innovative products backed by systems and procedures that don’t have to take into account legacy business. They could essentially start the business from a clean slate, while other established companies have only been able to slowly adapt to changes.

    The Vitality system that was implemented looks to not only provide rewards to Discovery’s clients, but also improve their health, thereby reducing the cost of medical bills, and also extending their life expectancies. This ultimately not only improves the client’s quality of life, but also Discovery’s bottom line.

    Another great business decision has been their ability to integrate the various group companies. The more products that the client uses in the Discovery portfolio, the cheaper their products become. Essentially the businesses are cross subsidizing one another.

    In terms of the earnings drivers, the two established South African businesses (Health and Life) drive the lion’s share of the business, contributing over R1bn and R1.1bn respectively in earnings. Vitality generates a further R40m, while their other businesses are still in their loss making stages. Discovery Invest, for instance, made a loss of R122m over the year. It is understandable for new ventures to be loss making to start off with as they grow their market share (as with any start up), but if Discovery is able to grow their business at the same rate that they have in the health and life business I’m pretty sure that they will soon be making a profit.

    Discovery is a quality company and understandably trades at a premium to the market (PE of 14.93 compared to the market’s 13.35). Despite the excellent results, the share price was down just over 1% today in line with the broader market.

    Take care,

    Mike Browne
    info@seedinvestments.co.za
    www.seedinvestments.co.za
    021 9144 966

    Permalink2009-09-02, 18:50:52, by Mike Email , Leave a comment
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