18 August 2009

NHI casts shadow over Discovery

Government's proposed NHI medical funding scheme may be weighing on the share price of financial services group Discovery Holdings, but its earnings prospects remain good.

Government's proposed National Health Insurance (NHI) medical funding scheme may be weighing on the share price of financial services group Discovery Holdings, but its earnings prospects remain good, said analysts.

As the debate around the NHI gathered steam in June 2009, the Discovery share price slumped despite an improvement in overall market sentiment. The share fell from a high of 2 870c (May 28) a share to a low of 2 369c (22 June) but has subsequently recovered to above 2 600c a share.

The proposal to introduce the NHI potentially puts government at loggerheads with private medical aid insurance service providers.

NHI funded with tax money
According to preliminary NHI proposals, tax will be levied on consumers to fund the NHI, while the existing tax incentive of making medical aid contributions will disappear. This may prompt many middle-class consumers to cancel their medical aid membership, opting to use only the government-funded service.

In response, many larger medical insurance businesses have already begun to reposition themselves.

In a recent interview Liberty Health CEO Dr Peter Botha told the group was concerned about government intervention in the sector and had begun to pursue opportunities in African markets, rather than focus on South Africa.

"Discovery had already begun to change its model into a more diversified financial services business," said a local analyst, pointing to the moves the company had made to develop its life insurance and investment offerings Discovery Life and Discovery Invest.

These two business units generated revenue of R993m and grew operating profit by 29% to R618m, for the six months to end-December 2008.

Discovery released a trading update on Friday, saying it expected headline earnings to be between 25% and 35% higher than the 172c per share the company reported for the year to end-June 2008.

Discovery plays a meaningful role
The company was boosted by improved sales at its UK-based PruProtect business.

Stockbrokerage Barnard Jacobs Mellet (BJM) advised its clients: "News on the National Healthcare Insurance is an overhang over the counter, but as we have stated before, we believe that even in a worst-case scenario Discovery will have a meaningful role to play."

BJM described the company as being on an undemanding forward price-to-earnings multiple of eight times.

According to the latest statistics from the unit trust sector, fund managers were net sellers of Discovery for the quarter to end-June. The largest sellers included Coronation, Old Mutual, Stanlib and Investec, while Sanlam Investment Managers and Nedgroup's Rainmaker Fund were buyers of the share. – (, August 2009)


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