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RYK VAN NIEKERK: Discovery is one of the leading South African financial services groups and also one of the biggest entrepreneurial success stories since it opened its doors in 1992. One can hardly believe it is still only 31 years old. Today it does business in 40 countries, provides life cover to 30 million people and has 13 500 employees. Its market value is R100 billion and it is roughly the same size as Bidvest and Nedbank.
The group released financial results today for the year to the end of June 2023.
Normalised headline earnings rose by 32% to R7.7 billion and the board declared a dividend of R1.10/share.
Adrian Gore is the founder and CEO. Adrian, thank you so much for your time. In the results announcement, you show four graphs on Page 2 of a document of close to 270 pages, and they relate to Discovery’s various profit lines over the past five years; and the latest results are the highest on all four graphs. Are these the best results Discovery has ever produced?
ADRIAN GORE: Yes, they certainly are. I think we’ve managed to achieve very consistent growth over our entire kind of history. Certainly through Covid, we had a bit of a dip, but the growth then came back in 2022 very strongly and our ’23 is even stronger. So for sure it’s been the best year in our history.
Read: Discovery: Solid results, despite ‘tough, complex and volatile’ year
But I think maybe to make the point, the robust performance has been across the board. If you look at the different businesses in the group, all have performed well, and from that perspective, it has been a very, very pleasing time.
RYK VAN NIEKERK: You also state in the results that the economic environment and the trading environment in South Africa is very, very tough. Remgro also reported results today, and they also reported very strong earnings growth. How difficult is the business environment in this context where big companies which are very dependent on the South African market are actually performing really, really well?
Read: Remgro dividend up 60%, despite ‘most difficult business environment since inception’
ADRIAN GORE: I actually think it’s paradoxical. I think it is tough. People are experiencing considerable difficulty with the cost of living. I think people are experiencing considerable difficulty with energy and all the stuff we live with, and I think that’s a reality.
But there’s some resilience in the economy as well that we often underestimate, and I think you see that coming through in the demand for products.
Interestingly, during this time our lapse rate – in other words people dropping policies, leaving Discovery Life or Discovery Health, etc – actually has been very, very tight, better than expected.
So there is some paradox between [the] kind of narrative and reality, between people’s experience and some of the financial reality. So I think it’s more complex than just to kind of broad brush [stroke] that it’s tough. I think it’s multi-dimensional.
RYK VAN NIEKERK: And it underlines the quality of leadership in this country in the private sector.
Let’s talk about Discovery Bank. It was launched in 2019 and you have reported that at the end of June ’23 you had just over 700 000 clients. That is 50% higher than in the previous year, and you are signing up 1 000 clients a day. Is that according to plan?
ADRIAN GORE: It’s better than planned. The bank’s rollout has been absolutely fantastic. This particular year the velocity has increased; a thousand clients a day is quite a bit up from the previous period. On every measure, the bank is doing better than expected.
Ignoring the kind of numbers, just the anecdotes, the folklore, people joining, what they’re experiencing in the bank is remarkable. So for us it’s probably the biggest thing we’ve ever done. Despite all the global things we’ve done …
Discovery Bank really has come of age this year. We expect to break even operationally by the end of this calendar year.
That’s tough going, but I think we’ll get there.
And the bank is very well-positioned. It is not only its functionality now, but the kind of construct of how it brings all of our products into it, it opens up ecosystems like travel, health. We’re rolling out more stuff next week.
So if I think about the year-end in review, it certainly was one of the stars of the show for sure.
RYK VAN NIEKERK: It’s over the loss of R770 million, which is less than the R1 billion loss of the previous year. You’re expected to turn a profit in this current year. That is a massive turnaround.
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ADRIAN GORE: We expect operational profits. So quite a bit of that R770 million is acquisition and our advertising.
We’re being pretty clear about the operational piece of it, but in fact during the 2024 year, we expect to break even and turn to profit.
If you look, the revenue growth has been kind of up like 50% or more. So if you can keep that philosophy going, I think what’s interesting about the bank, the quality of clients joining the bank, the engagement to the products, it drives both I think the value for money but also the revenue flow.
So if the velocity continues like this I think we’ll meet those goals. It has been ahead of plan quite substantially.
RYK VAN NIEKERK: Discovery also has a very interesting health insurance business in China. It is Ping An Health and it has been referred to as a possible Tencent in the health-insurance industry in China. Its profits during the period rose by 76% to R600 million. Is that from a low base or is this business just exploding?
ADRIAN GORE: It’s an incredible business, Ping An Health. It covers over 20 million people.
The actual premium revenue now is over R50 billion. So this is a massive company, grown organically over a few years. It has been remarkable.
The period itself has been over this Covid lockdown, so it’s been a very, very difficult time, as you know, in China. But we expect strong growth going forward.
The ability to perform like this during a very difficult time shows the resilience of the business, and then I think the investment case for Ping An Health – you’ve got 400 million or more people in the middle class growing and ageing. When it comes to healthcare, that creates demand for private health insurance. So it’s very well placed. I think we expect very strong growth going forward.
RYK VAN NIEKERK: Just lastly, we are seeing quite a swift deterioration of the state’s fiscal position, and it can have a far-reaching impact on the economy and especially financial services companies, as well as banks if this fiscal position really deteriorates and spirals out of control. I’m sure you are worried about this – but how worried are you?
ADRIAN GORE: I am concerned. I’m concerned about it, and that’s why we are part of this business initiative to work with government. I think we have to change narrative quickly. I think we have to fix some of our key aspects that we are focused on – energy, logistics, etc.
All of this stuff is kind of like death-by-a-thousand-cuts [and] keeps coming in different ways, eroding confidence, turning around investment.
Read: 115 CEOs sign on to campaign to reverse SA’s current trajectory
It would seem an insurmountable set of problems. I actually don’t think they are. I think that if you get some traction, we can turn sentiment around; we need to get the economy to grow. So I’m very concerned. You can see it in our business – rising interest rates, which is for sure the sovereign risk premium that is still coming, and you’ve got a fiscal shortage and you need to raise debt.
So these are concerning issues. Again to the point we made earlier, it’s paradoxical. There is some resilience in the economy.
Our ability to grow without electricity illustrates a very, very agile, certainly private sector.
So there is a concern about it. I think we need to keep our heads down and keep building and investing and doing what we can. And as business, we must get traction in this initiative working with government in a constructive way.
RYK VAN NIEKERK: Yes, I think that’s an excellent point. And when trading conditions improve, many businesses will fly – and that’s what we need.
Adrian, thanks so much for your time. That was Adrian Gore, the chief executive of Discovery.
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