Discovery | Deeper investment cycle
We believe Discovery (DSY) is evolving into a capital light fintech platform based off user engagement and Vitality data. A deeper investment cycle has reduced DSY's H1'19a normalised operating profit by 10% (R390m in additional costs). We expect continued investment into the DSY Bank and UK Invest platform to reduce FY'19f operating profit by c.9% (c.R767m) However, DSY is trading at its three-year average forward P/E of 15x. Excluding the organic development of loss-making new initiatives, DSY is trading at a 12x forward P/E. Despite the potential for increased earnings volatility, we remain bullish on DSY's ability to add adjacent markets to the Vitality Group. In our view, the Vitality Group is valued at c.R59/share (R38bn), while the SA business alone is worth R145/share.Discovery is an integrated financial services organisation, focusing on health insurance, life assurance, investments and savings products, wellness and short-term insurance. Co. operates primarily through six subsidiaries which operate in South Africa: Discovery Health, Discovery Life, Discovery Collective Investments and Discovery Investment Services, Discovery Vitality and Discovery Insure. In the U.K., Co., via a subsidiary, Discovery Offshore Holdings Limited, has a joint venture with Prudential plc., the PruProtection group of companies, which provide health and life insurance products. In the U.S., The Vitality Group Inc. provides Vitality as a stand-alone product.
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