Having listed on the JSE in 1999, Discovery Limited has been a phenomenal success generating early investors multiples of their money.
The group administers Discovery Medical Aid (a separate legal entity to the listed company), and through data mining, clever incentives and cross-selling, has won huge medical aid administration market share and profitable growth. It has also built out a financial services offering expanding from insurance to its most recent launch of Discovery Bank.
Unfortunately, trees do not grow to the sky: Discovery’s core offering is seeing strong trading down from higher to lower end options; the scheme appears to have stopped winning many new members; the group’s banking start-up is losing billions; and the share price is down 16% over the last three years.
Finally, there remains the dark, looming presence of National Health Insurance (NHI) and potentially negative rules changes for private medical aid that leave the group’s core potentially vulnerable.
Interestingly, and rather quietly, a competitor has been building up in the background: AfroCentric Investment Corporation (ACT).
While dwarfed by Discovery’s R98 billion market cap, inside AfroCentric’s mere R3 billion market cap lies Medscheme.
Medscheme has Sanlam as a strong minority shareholder and administers a whopping 3.8 million lives within its schemes, the largest being Bonitas and Fedhealth. Despite the difference in the market cap, this operating metric compares favourably versus Discovery’s ‘health lives’ of 3.5 million (see page 3 here).
Perhaps more interestingly, while Discovery has grown from its medical administration service into financial services, AfroCentric has steadily grown further into the healthcare market.
AfroCentric’s other businesses offer a range of healthcare-related technology services, pharmaceuticals and other healthcare products, and – quite interesting – runs a near-annuity-like logistics services for the delivery of chronic medications (which it has cross-sold cleverly into many of its schemes for its members’ benefit).
In fact, this move further into the healthcare value-chain has seen AfroCentric’s contribution from non-service related revenue grow quickly (+54% y/y in FY20!) to nearly rival its original revenues (Figure 1).
These revenues are ramping up profits quickly too and the ‘Health Products’ segment saw its profits basically double in FY20 (Figure 2).
Given this context, how does AfroCentric compare in terms of growth rates and valuation to Discovery (and perhaps Momentum Metropolitan Holdings)?
Figure 3 shows that AfroCentric’s revenue has a far superior five-year compound annual growth rate (CAGR) to Discovery (20% CAGR y/y versus only 10% CAGRy/y), yet the market has only rewarded the group with a third of its price-to-sales (0.4x versus Discovery’s 1.5x).
Furthermore, while Discovery’s price-earnings ratio (PE) has been blown out of the water by pandemic adjustments and its bank’s losses, AfroCentric is sitting on a very respectable 9.1x PE with an attractive 5.6% dividend yield.
Finally, far from NHI and the public sector’s potential encroachment on private medical aids being a threat, AfroCentric views this as an opportunity.
The group is strongly empowered, and indeed recently won the GEMS managed care contract in the public sector. If/when the NHI is upon us, AfroCentric is well-positioned to manage a good – and profitable! – portion of it.
So perhaps it’s time the market discovered AfroCentric?
Not that Discovery is a bad business – but AfroCentric appears well-positioned, faster-growing and potentially cheaper as an investment.
Keith McLachlan is a small cap analyst.
Listen to Nompu Siziba’s interview with Episodic Health CTO Will van der Leij: