Release Date: September 19, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Discovery Ltd (JSE:DSBP.PFD, Financial) reported a 17% increase in normalized operating profit, indicating strong financial performance.
- The company experienced an 18% growth in new business, showcasing its ability to attract new customers and expand its market presence.
- Discovery Bank achieved operational profitability for the first time, with expectations to become fully profitable in the upcoming year.
- Ping An Health, part of Vitality Global, reported a 56% increase in operating profit in RMB, highlighting strong performance in the Chinese market.
- The company has a clear strategy for future growth, expecting earnings to grow between 15% to 20% over the next five years, with a focus on cash generation and reduced leverage.
Negative Points
- Vitality UK faced financial challenges, with a GBP30 million claims overrun due to NHS dynamics, impacting overall profitability.
- Discovery Health is dealing with high rates of medical inflation, with rate increases ranging from 7.4% to over 10%, which could affect affordability for customers.
- The company is navigating complex regulatory challenges with the National Health Insurance (NHI) in South Africa, which could impact its operations.
- VitalityLife in the UK experienced a 27% drop in operating profit due to basis changes in an old block of business, highlighting challenges in managing legacy issues.
- Discovery Insure faced underpricing issues during the COVID period, which, along with supply chain challenges, affected its profitability.
Q & A Highlights
Q: Do you think a separate listing of Vitality Limited would unlock value? Are you considering restructuring the Group into two separate listings?
A: No, it's not inevitable that we detach or list Vitality Limited. The plan is to focus on efficiency and create two businesses of value, which will provide optionality and a clear line of sight for scale. This could lead to significant profitability in the future, but a separate listing is not the current plan.
Q: How confident are you that the UK health earnings can reverse the GBP30 million loss in the next 12 months? Should the 20% to 30% earnings growth guidance for Vitality Limited adjust for the 2024 one-off charges?
A: We are cautiously confident that the premium increases will catch up with claims, reversing the trend. The 20% to 30% growth guidance for Vitality Limited is rebased off the 2024 financial year number, and we are confident in achieving this over the next five years.
Q: Did the bank generate a positive cash earnings during the second half of the period? Where do you see the loan to deposit ratio trending over time for Discovery Bank?
A: The bank did generate an operating cash surplus in H2, closely tracking the operating profit. We expect the loan to deposit ratio to level off at about double its current level, allowing room for growth in advances relative to the deposit base.
Q: Why doesn't cash conversion improve beyond 66% going forward?
A: The cash conversion reflects the mix of different businesses, with life insurance expected to grow faster than the health business, which is 100% cash. Additionally, the cash conversion for Ping An is expressed as dividends received, which doesn't show a big increase in the ratio.
Q: Why are you not paying a dividend similar to your peers, despite anticipating improved capital structure and cash conversion? Would you consider gearing your dividend?
A: We've been conservative with dividends, but as cash generation strengthens, the dividend coverage of 5 times could potentially decrease. However, it would be irresponsible to declare this now without seeing how the plan plays out.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
