Discovery Falls to 16-Month Low as Profit Drops on Soaring Costs

JOHANNESBURG (Capital Markets in Africa) – Shares of Discovery Ltd. dropped to their lowest level since October 2017 after the South African financial-services company said first-half earnings will decline after investments into new initiatives soared.

The owner of a wellness loyalty program that stretches from China to the U.S. is expanding into banking and commercial insurance to tap deeper into its existing customer base to boost income. Spending on new projects in the six months through December rose to 21 percent of group earnings, contributing to a 16 percent decline in adjusted income over the period compared with a year earlier, Johannesburg-based Discovery said in a statement on Friday.

“Everyone knew it would cost money to build the bank, but not to this extent,” said Wayne McCurrie, a portfolio manager at FirstRand Ltd.’s FNB Wealth and Investments. Without that spending, earnings would’ve been up 5 percent to 6 percent and the other businesses have mostly done well, he said.

While most of its businesses, which also include investments and the country’s largest medical-insurance administrator, had a strong operating performance, the life-insurance unit saw a spike in large mortality claims amounting to about 8 percent of the group’s earnings. The division “has altered its reinsurance structures to ameliorate this volatility going forward,” Discovery said, adding it expects to revert to its target-growth levels over the next five years.

The stock slid as much as 5.8 percent to 136.63 rand before paring losses to trade 2.4 percent down at 141.73 rand as of 10:35 a.m. in Johannesburg.

“Discovery’s new businesses will require investment through their start-up phase; however, the 21 percent spend on new businesses is expected to decrease over the next few years toward previous levels,” it said. “Profit growth is expected to return to its stated goal of the consumer price index plus 10 percent and is well capitalized for its five-year planning horizon.”

 Source: Bloomberg Business News