Discovery chief executive Adrian Gore noted that existing businesses had performed well and that new business growth investment remains a core part of strategy at the group’s financial results announcement for the year ending June 30 2016 on Tuesday.
Gore said the business has made progress in a tough environment, despite a volatile local currency and the accelerated decline of interest rates in the UK following Brexit.
Spend on new initiatives was up 73% to R823 million. Profit from existing business increased 15% to R7.2 billion and headline earnings were up 7% to R4.3 billion. Headline earnings per share were up 1% and the group declared a dividend of 90 cents.
Operating profit was up 11%, down on the previous year. Gore attributed this mainly to increased spend on new business initiatives, pointing out that removing new business initiatives from the equation shows operating profit growth of 15% for existing businesses.
“Earnings from the income statement are reinvested in new business,” he explained. Funding new initiatives increases debt and the impact of debt funding has been 4%, he said.
Discovery Health operating profit was up 12% and new business growth was up 22%. The business continued to invest in digital assets to develop the healthcare system and to “attract a younger demographic” to the medical scheme.
Gore also noted that Discovery Life was “growing strongly”, with new business growth up 5% and operating profit up 14%. “The traction is accelerating,” said Gore. He attributes this to service delivery to consumers.
Discovery Invest operating profit was up 22% to R563 million, while new business grew by 17% to R1 932 million.
On the groups’ new banking initiative, Gore said it was going through a “rigorous regulation process”. “There is nothing we can say on the initiative in the public domain,” he added. Discovery has appointed senior teams to lead the delivery of the business, and is building the necessary system and infrastructure.
Discovery said on its intent to enter banking:
“Over the period, progress was made with respect to Discovery’s intention to enter banking. The licensing and regulatory processes commenced and while the licence application is pending regulatory approval, key engagements are underway with the South African Reserve Bank and other regulatory bodies.”
“Discovery has appointed a combination of senior seasoned bankers and Discovery executives to lead the execution and delivery of the banking business.”
UK businesses feel impact of Brexit
UK business Vitality Health’s operating profit was down 17% to R186m, due to more “internal” challenges. The profit of Vitality Health is not sufficient and should be grown substantially, he explained. “This is a business about narrow margins.” The team will focus on the quality of new business and acquisitions to grow profit going forward.
Brexit impacted Vitality Life, due to the “dramatic drop” in interest rates. “Vitality Health and Life had a complicated year,” he said. But Gore believes that the group has a substantial share in the market.
“Rates impact pricing, profitability and embedded value.” Although the environments are “complex”, Gore said the Discovery model is immune to these events. Life’s operating profit was up 25%.
If interest rates rise and the British pound strengthens, it will be profitable for the group, he explained.