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Discovery shares rise on underlying performance

With investors focused more on operating performance than the negative impact of interest rate changes and foreign currency losses.
Image: Moneyweb

Shares in South Africa’s Discovery rose almost 4% on Tuesday even as it warned of an up to 15% decline in half-year profits, with investors focused more on operating performance than the negative impact of interest rate changes and foreign currency losses.

The insurer, whose model ties premium rates to clients’ lifestyle choices, said all of its business units had performed well and, unlike other local rivals, provisions taken last year had proved largely sufficient during a second, more severe wave of coronavirus infections.

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“Operating performance was excellent, with normalised profit from operations expected to rise between 17% and 21% compared to the six months ended 31 December 2019,” Discovery said in its statement.

However its headline earnings per share (HEPS) – the main profit measure in South Africa – were hit by the impact of average effective interest rates on the valuation of assets under insurance contracts and a R360 million ($24.54 million) foreign currency loss due to a strengthening of the rand.

HEPS for the six months to December 31 would likely be between 296.1 cents and 264.9 cents, compared to 311.7 cents reported a year earlier.

Excluding these two factors, the decline in profits would be limited to 3% and profits may even rise by 1% on a normalised basis, it said.

It did add another R150 million in provisions for mortality following an intense second wave of coronavirus infections, but said overall the more than 3 billion in provisions it had allocated last year had proved sufficient.

The insurer will report its half year results on February 25.

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