Discovery staunches price bleed

Johannesburg - Medical insurance business Discovery Holdings staunched a nine-day share price decline on Thursday after issuing improved financial numbers - but uncertainty continues about the health of its offshore ventures.

Discovery gained as much as 6% intra-day and closed 4.5% higher on the JSE at 2 445c/share. This was after retreating from more than 2 600c/share on February 10 down to 2 380c/share, a value loss analysts said was related to apprehension ahead of its half-year figures ended December.

It was possible that investors were spooked after not receiving an alert from Discovery to inform them that earnings would be a fifth higher, an analyst said.

In terms of JSE reporting standards, public companies are required to inform shareholders of a 20% or more change in expected earnings levels.

Discovery Holdings reported a 19% increase in interim headline share earnings to R489m. Operating profit was about a fifth higher to R746m, after including its loss-making UK business units. Discovery Holdings declared an interim dividend of 25.5c/share.

In general terms, the company's healthcare business performed well but the global recession put pressure on Discovery's UK businesses and would continue to do so, analysts said.

"Investors have not fully bought into the offshore story," said Paul Theron, an analyst at Vestact. "Discovery has a good business but there's some anxiety about whether the UK business will prosper," he said.

PruProtect, Discovery's joint venture with the UK's Prudential Plc, posted a R104m loss in the six months to December. Discovery Holdings said this loss was in line with expectations, but Theron raised a flag over the business unit.

"Discovery faces more challenges in the UK. It will be targeting break-even but it's possible it'll come up short again," he said.

However, the flagship healthcare business, Discovery Health, would continue to perform well, said Wilhelm Hertzog, an analyst for Cape-based asset management firm Re:CM.

"Discovery has a unique product offering," said Hertzog. "This means it can afford to raise premiums because it has quite a sticky client base," he said. This was also true for Discovery's Life business, where profit margins were under pressure as it wrote more (lower margin) investments only business.

Discovery Holdings' income statement shows that claims increased 23% to R1.2bn. However, insurance premium revenue has increased by nearly 30% to R2.5bn from R2bn in the comparable period.

Most of this growth is driven by Discovery Life - it grew from R1 424m to R1 951m, an increase of R527m. This growth in premium revenue was driven by strong business growth and by inflation related increases," said Ricky Farber, CFO of Discovery Holdings.

"Over the past few days, Discovery shares were being sold because it didn't release a trading statement," said Hertzog. "That scared investors a bit."

The upward movement of the share price meant the market was now taking comfort in Discovery's good results, he said.

- Fin24.com