Discovery shares bounce back 9%
The lower tax rate was a surprise but growth in operating profit was in line with market expectations
Discovery’s share price leapt more than 9% on Thursday, reversing earlier weakness after a strong trading update from the insurance group, which is due to launch a bank later this year.
A lower effective tax rate helped drive an expected increase in interim normalised headline earnings per share of 28%-33% to R4,51, Discovery said in a statement.
Normalised operating profit for the six months to December 2017 was expected to be between 15% and 20% ahead of the previous matching period’s at R3.9bn-R4.1bn.
While the lower tax rate was a surprise, growth in operating profit was in line with market expectations, said Warwick Bam, an analyst at Avior Capital Markets. The trading update had provided "reassurance" to the market, reaffirming that Discovery was "still a growth story".
Rising interest rates in the UK bode well for Discovery’s life insurance business in that market, VitalityLife. Its emerging businesses such as Vitality Group and Discovery Insure, which have previously weighed on earnings, are expected to post profits within this financial year.
Discovery, which was the best performing stock among banks and insurers in 2017 on a 62% rise, came under some selling pressure in January on profit taking, as investors cashed in the previous year’s gains.
There was also speculation that it might be a target of short-selling outfit, Viceroy Research, which has been locked in a back-and-forth dispute with Capitec, on which it issued a damning report on January 30.
But less than 5% of Discovery’s stock is out on loan, implying limited short selling, where traders bet on share price falling. Among Bloomberg-rated analysts, three rated the share a "buy", one a "hold" and three a "sell".
Discovery continues to spend on new initiatives, including its retail bank, expected by June, and an investment business in the UK. It reports interim earnings on Tuesday.