Adrian Gore. Picture: FREDDY MAVUNDA
Adrian Gore. Picture: FREDDY MAVUNDA

Many investors have missed out on Discovery’s strong share price performance. Over the past year, the share is up 45% to R180. This puts the performance of Adrian Gore’s company far ahead of that of rivals such as Liberty (up 17%) and MMI Holdings (down 9%), as well as staid, established firms such as Sanlam (up 35%) and Old Mutual (up 17%).

But few SA asset managers have benefited from this rise because, outside of the insurer’s main shareholder, Rand Merchant Investment Holdings (which holds 25.8%), the rest of Discovery’s shareholder register is dominated by foreign shareholders.

The question is: does Discovery still offer good value for investors? Or has its major growth spurt already happened?

One of the few SA funds with a weighting in Discovery of more than 5.5% is PSG Equity.

Kevin Cousins, PSG’s head of research, says SA analysts tend to value Discovery by the method used to value insurance companies — its embedded value, which is a way of calculating the present value of its future business plus net worth.

This shows how much more expensive Discovery is compared with its rivals. For example, Liberty Holdings trades on a 25% discount to its embedded value, while Discovery trades at a premium to embedded value of more than 70%.

With this in mind, Cousins says PSG is not as enthusiastic about Discovery at R180/share as it was at R120/share, because the margin of safety is much narrower. Nonetheless, he says Discovery still has many opportunities to deploy capital and grow.

But can Gore pull enough rabbits out of enough hats to justify the premium rating? Until now, the answer has been "yes".

Last week, Discovery announced that it had grown its operating profit by 19% for the six months to December — mostly due to a stronger showing in the UK, the Ping An Health business in China, and its short-term insurance arm. In the UK, its private health-care offering, Vitality UK, now insures more than 1m — good going in a country where the National Health Service covers most residents for free.

Many analysts remain smitten by Discovery’s technological savvy. International research firm Bernstein describes Discovery as a leading global fintech company in the insurance and health sectors, saying its Vitality "shared-value model" has made permanent improvements to mortality rates. As brokerage Vestact puts it: "When your friends are getting free Apple watches, Starbucks coffees and discounted gym contracts because they exercise three times a week, the clients become the best salesmen. The preventative health-care model is genius."

But Shilan Modi, an insurance analyst at Sanlam Investment Management, says it is important not to get carried away by the innovations.

Modi says the Ping An Health business (in which Discovery’s share of operating profit increased by 500% to R36m last year) and the new bank (which is not expected to be profitable for five years) are worth R25/share.

There’s plenty of buzz about the bank, but at the moment, there’s little flesh on the bones.

Denker Capital portfolio manager Jan Meintjes says he wouldn’t be surprised to see some of the features of eBucks (from sister company FNB) come into the bank’s product features. But he does not expect it to take on Investec in wealth management, or Nedbank and RMB in corporate banking.

While there are plenty of questions swirling about Discovery, Modi argues that much is forgiven because it is considered to have almost unlimited growth ahead of it — much like media company Naspers or education firm Curro.

But he says the reality is that the four core businesses — Health, Life in SA and Vitality Health and Life in the UK — are all mature and showing slow growth.

The operating profit at Discovery Life, the single largest contributor, increased by 4%. Not only is this below inflation, but it also hasn’t shown any real growth since July 2016.

Equally, Discovery Health already has a 56% share of the open medical aid market, and the Vitality businesses in the UK is not making significant gains in market share.

The high-growth engine is now considered to be short-term insurer Discovery Insure — though it has some smart competitors in Outsurance, MiWay and Telesure.

Nonetheless, Cousins says analysts consistently underestimate the effect of new businesses on Discovery. "Until about a year ago many had put a negative value on Discovery Insure." Today, he says, many people haven’t put any real value on the Vitality partnership. This may be Discovery’s fault: CEO Adrian Gore hasn’t clearly explained how profits are derived.

Cousins says Discovery might well put the market off with its "quite promotional" presentation, with too much showbiz. But bells and whistles and other complexities are all part of the group culture.

Denker’s Meintjes, who does not hold Discovery shares, believes the strategy and the way Gore presents it is impressive but, for him, it doesn’t make up for the risks implicit in the current share price.