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Trading update and voluntary trading statement: year ended 30 June 2019
DISCOVERY LIMITED
(Incorporated in the Republic of South Africa)
(Registration number: 1999/007789/06)
JSE share code: DSY, DSYBP
DSY ISIN: ZAE000022331
DSBP ISIN: ZAE000158564
JSE bond code: DSYI
("Discovery" or "the Company” or “the Group”)
TRADING UPDATE AND VOLUNTARY TRADING STATEMENT: YEAR ENDED 30 JUNE 2019
For its 2019 financial year, Discovery planned to increase investment into strategic initiatives significantly, most notably
the build and launch of Discovery Bank, creating an expected reduction in Group earnings1. This has necessitated a more
detailed trading update for the year ended 30 June 2019.
For the first six months to 31 December 2018 (“half-year”), this planned increased investment together with an
unexpected spike in large mortality claims within Discovery Life resulted in a substantial reduction in normalised
headline earnings per share. As explained at the time, Discovery Life has addressed this through various actions,
including reinsurance structures which reduce the exposure to large-claims volatility going forward as evidenced in the
second half-year. Investment in strategic initiatives during the second half of the year continued and remained in line
with budget, albeit above the long-term level of 10%.
For the financial year ended 30 June 2019 (“current year”), Discovery’s normalised headline earnings per share
(diluted)2 are expected to decrease by between 5% and 10% to between 795 cents and 753 cents (2018: 836.9 cents),
compared to the previous financial year (“prior year”). Core new business annualised premium income (“API”) is
expected to grow by approximately 13% while the Group’s financial leverage ratio (“FLR”) is expected to improve to
23% and the cash buffer to increase to approximately R4bn. This is as a result of the following:
* Approximately 20% of Group earnings (including associated financing costs) was spent on new businesses, most
notably Discovery Bank, VitalityInvest, Vitality1, Umbrella Funds and Discovery for Business. Spend in new
businesses increased by 114% over the prior year.
* Discovery Life’s performance largely affected by an unusual spike in high value mortality claims as was fully
explained at the half-year. Other key experience metrics remain largely in line with expectation in the second half-
year, despite a challenging operating environment.
* Performance from all of Discovery’s businesses as follows:
Approximate summary of business performance for the current period compared to the prior period
Approximate increase / (decrease) in Approximate core new
Normalised profit from operations business API
Discovery Health +10% +1%
Discovery Life (see above) -9% +6%
Discovery Invest +9% +6%
Discovery Vitality +3% -1%
VitalityHealth +29% +22%
VitalityLife +12% +10%
Discovery Insure +128% -1%
Vitality Group +71% Refer footnote 3
Ping An Health +89% +76%
Increase in spend on new businesses (before
allowing for finance costs) +114% N/A
Discovery Group (consolidated) -1% to -5% +13%
1 Normalised profit from operations
2 The percentage change in the current period is approximately the same for both undiluted and diluted earnings per share
3 Vitality Group gross revenue, not included in core new business API, increased approximately 43%
Other items impacting earnings
Normalised profit from operations is expected to decrease by between 1% and 5% to between R7 581m to R7 900m (2018:
R7 980m). The difference between normalised profit from operations and normalised headline earnings was
predominantly affected by an increase in borrowings which resulted in an increase in finance costs of approximately
R240m over the prior period, mainly due to funding investment in new initiatives. The Group’s headline earnings per
share2 is expected to reduce by between 10% and 15% to between 809 cents and 764 cents compared to the prior year
(2018: 899 cents), impacted by movements in deferred tax assets and foreign currency hedges in the current and prior
year. Basic earnings per share2 is expected to increase by between 10% and 15% to between 963 cents and 1,007 cents
compared to the prior year (2018: 875.6 cents). This increase in basic earnings includes the previously-disclosed disposal
and dilution of the Group’s interest in Cambridge Mobile Telematics (“CMT”) which resulted in a profit of US$56 m before
tax as well as an accounting gain, in terms of IFRS 3, on the Group’s original interest in the Discovery Card business of
R761m.
Prospects for growth
Discovery is well positioned for growth, through its robust established businesses, emerging businesses which are scaling
and expected to grow strongly going forward, and significant new initiatives which are being built. New businesses will
require investment through their start-up phase, however the c.20% spend on new businesses is expected to decrease
over the next few years toward the long-term goal of 10% of earnings. Profit growth is expected to return to its stated
goal of CPI plus 10% and the Group is well capitalised for its five-year planning horizon.
Discovery is supportive of the aims of the recently published National Health Insurance (NHI) Bill in SA, and will work
closely with the relevant policy makers and stakeholders to ensure an optimal outcome to the legislative process. The Bill
is not expected to have a material long-term impact on the Discovery Health business and may in fact present new
opportunities for growth and product innovation.
The lower interest rate environment in the UK is expected to remain an important dynamic for some time and this will
negatively impact the UK-based VitalityLife business, albeit that a significant component of this impact is unrealised and
likely to reverse once interest rates normalise.
Discovery’s results for the year ended 30 June 2019 are being finalised and are due to be released on SENS on 4 September
2019. This trading update covers some important elements of the expected results. Whilst Discovery has a reasonable
degree of certainty that the information contained in this update reflects the outcome for the year ended 30 June 2019,
it is subject to final review.
The financial information on which this trading statement is based has not been reviewed and reported on by the
Company’s external auditors.
Sandton
30 August 2019
Sponsor
RAND MERCHANT BANK (A division of FirstRand Bank Limited)
Date: 30/08/2019 01:33:00
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