The game changer for Discovery

Discovery is currently in a strong position, with the company continuing to benefit from its Vitality model.

Speaking to BusinessTech, Chantal Marx, Head of Investment Research at FNB Wealth and Investments, said that Discovery saw strong growth across key metrics in its latest full-year results ended June 2024.

Marx added that further uplift came from reduced cash strain amid lower spending and lower losses on new initiatives, particularly Discovery Bank.

The company also benefit from increasing cash generation of Discovery Life and Invest.

“Despite a challenging macroeconomic environment, the group delivered strong premium and revenue growth,” said Marx.

“Better cash flow resulted in a higher-than-expected uplift in the dividend – something that the market really liked at the time.”

She noted that the success of the Vitality model remains a differentiator for Discovery and a key driver of customer retention and acquisition and overall operational strength.

This is because Vitality helps Discovery fine-tune its actuarial assumptions due to enhanced data availability.

The new businesses, including Discovery Bank, also offer a potential growth vector and diversify away from South African health insurance, as does the international market expansion.

The biggest risk facing Discovery is the regulatory pressures facing the company, especially how the local NHI story.

The NHI proposes universal health care via a government-run fund but will see the strongest limitations on what medical aids can offer to customers.

The group also faces risks from more conservative accounting requirements and heightened investment in new ventures and markets.

Marx said that Discovery is trading on a premium to an embedded value of 16.3% based on FY24 (FY24: 4.8% discount; 1H24: 8% discount).

“The stock, therefore, looks expensive, but this is perhaps justified by higher growth expectations relative to its peers,” said Marx.

Discovery’s advice for investors

With its own investment business, Discovery believes that the outlook for South Africa is more positive for 2025, even if global risks remain.

Discovery Invest CEO Kenny Rabson said that the global economy is experiencing a stabilisation in key areas, with above-trend growth in the United States and a turning point in China’s recovery.

However, the return of protectionism in the US following the election of Donald Trump has led to extreme uncertainty in global markets.

“We are navigating an atypical global environment,” said Rabson.

“Old investment playbooks need renewal as economies transform, new leaders emerge, and long-term trajectories shift.”

On a local front, South Africa’s momentum has benefitted from the formation of the Government of National Unity (GNU,) the 10-month suspension of load shedding in 2024 and the start of 2025.

Despite a slight reemergence of load shedding two weeks ago, the trajectory looks far more positive for load shedding.

“Investors must remain aware of short-term disruptions but focus on the bigger picture: An economy that is stabilising, private-public partnerships are working, inflation moderating, and further interest rate cuts on the horizon.”

He also cautioned against reaching for short-term events. South African investors have been overly conservative recently, which has led to many missing out on market rallies by storing their wealth in cash.

“While negative headlines may paint a picture of the crisis, the reality is that markets have remained resilient over time,” said Rabson.

“History shows that disciplined investors who maintain a well-diversified portfolio benefit most in the long run.”