Investors in Discovery soothed on spending, shares rise 7%

Shares in Discovery rose almost 7% on Thursday, as investors who had been spooked by a profit warning this week welcomed more detail on hefty investments that have been repeatedly hurting the insurer’s bottom line.

The company, which has shaken up traditional approaches to insurance with a model that ties premium rates to clients’ lifestyle choices, has been sacrificing profits in order to plough funds into new ventures including a bank.

Its stock lost 8% on Monday when it warned profits would again drop by up to 13% as a result. It said on Thursday its diluted headline earnings per share – the main profit measure in South Africa – fell by 10% to 311.7 cents ($0.2068).

But Warwick Bam, analyst at Avior Capital Markets, said the full results statement provided more detail on its spending, amounting to over R1 billion during the period, that investors could welcome.

He said he was comforted to see that more than 50% of Discovery’s investment spend went on the bank. Some had been concerned this was higher, with other new business lines expected to stop sucking up funds sooner.

Discovery said on Thursday that investments in new ventures were weighted to the first six months of the year, and likely to decline in the second half.

It has said previously spending on the bank, which adapts its model of insurance to lending by tying interest rates to customers’ behaviour, will fall quickly over the coming years.

Since its launch last year, Discovery said the bank had grown to serve 78 000 clients with deposits of R 1.2 billion and R2.5 billion of credit granted.

Its shares rose just under 7% after market open on Friday, and were 5.9% higher at 0741 GMT.