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The go-to man when it comes to anything in the financial services industry, Denker Capital’s Kokkie Kooyman dissects Discovery’s trading update. The medical insurer turned conglomerate has been one of the hype stocks of the last few weeks, with news that 2020’s rockstar fund manager Cathie Wood recently bought R650m in her Ark FinTech Fund. Discovery, which is also owned by Counterpoint Value Fund manager Piet Viljoen, is seen as one of the few growth companies on the local bourse. Kooyman unpacks the conglomerate’s huge runway, which extends over a number of business units and jurisdictions. – Justin Rowe-Roberts
Kokkie Kooyman on Discovery’s trading update:
Banks have generally been able to release the bad debt provisions they made last year. But for the insurers, all of them have had to increase provisions due to what they call higher mortality claims. And discovery is no different. So its operating result is actually quite good or expected to be good. They say what they call APE or average premium income will be let’s say plus minus nine percent year on year, which is actually quite good under the circumstances and operating profit is positive. But the headline earnings per share is down and that’s largely because of that mortality claim. So three things affected that. Firstly, in South Africa, the fact that our vaccination rate was quite slow, slower than they expected. Secondly, they’ve got a higher concentration than the other insurers in Gauteng, where the death rate or mortality rate has been higher. And then thirdly, in South Africa the Delta (the third wave) had a bigger impact. So they had to create more provisions than they did last year. Last year was R1.1bn. This year, R2.4bn. So that’s quite a significant increase. But if you look at the rest of the result, it actually was a fairly good year. A lot of the new – what we call emerging markets, emerging businesses have come through strongly. The bank is starting to kick in as well, but still having to spend more on technology. But overall, I think it’s a satisfactory result, but driven down by the higher mortality provisions.
On the Chinese Communist Party’s cutthroat approach to capitalism:
In our Western capitalist eyes, they keep shooting themselves in the foot. There was another release in the last few days which was posted on an official website where they try and explain what they’re doing. They say that this is all for the benefit of the population. But sadly, the population has no say in this. But China is there – it’s a big market. It’s a big country. I think most commentators agree that you can’t afford to ignore China. The growth won’t grow as fast. It’s a different type of growth.
But once the market gets used to what the government is trying to do, investors will be back. But I do think that what the past few weeks or actually now months have proven to us is that the government does not think with the same mindset as Western governments. So you do have uncertainty so shares shouldn’t trade at the same premium that they have in the past. I think that’s what the market is battling with at the moment, where to value the shares. But I think good businesses like Ping An Insurance and Ping An Health will over time do well.
On Cathie Wood buying R650m worth of Discovery in her Ark FinTech Fund:
You know what is amazing is that if Discovery was to IPO now, it would basically triple the valuation. All these new IPOs (FinTech or InsureTech IPOs) like Lemonade are listing at high valuations because this younger generation of investors are prepared to pay huge multiples for future growth – and Discovery gives you that. I think that is what Cathie [Wood] sees.
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