IN SOUTH Africa, we have two opposing forces, the NHI (National Health Insurance Fund) initiative and private healthcare, with Discovery Health Group as the flag bearer for private healthcare.
In this article, we take a closer look at some disturbing early warning lights.
1. The NHI bill aims to establish universal healthcare for all South Africans by abolishing the "two-tier" system, in which the bulk of healthcare spending is made in the private sector for the benefit of the few, while the mass of the population is relegated to the "under-funded" public sector. The NHI Fund would be managed by the state to buy healthcare services from the public and private sectors. Services would be free to the public at the point of delivery. This is the equivalent of providing everyone with free electricity and water. Currently, we experience the consequences of “free delivery”. Once a service becomes available under the NHI, medical schemes will no longer be allowed to cover it. Most commentators fail to believe that this disastrous bill will be implemented. The record shows that the ANC majority in parliament is difficult to stop.
The Health Professionals Collective – an alliance of nine professional organisations – said that the “unintended consequences” of the NHI would be severe. Let us call a spade a spade, there are no signs of professional expertise in any South African /ANC government State-owned enterprises. The fraudulent mishandling of the Covid-19 funds is still fresh in our minds
2. Considering this existential threat to the likes of Discovery, it is time to take a closer look from an investment point of view and check the vital statistics of the company.
The graph below depicts the company’s share price over the last 20 years. The company's share price has moved sideways with no clear upward trend since their moving to the super luxury magnificent new offices.
The table below indicates the important markers of the financials of the company.
The company does not look like an attractive buy at this point. A Return on assets of only 2.45% is low for a company that is considered mature in its life cycle. The dividend of 0.8% is most definitely a no-go for a pensioner’s portfolio. The company trades at a huge premium to its net assets.
3. In the last month, Discovery announced its planned tariff increase, and this was not well received by its clients.
After accounting for the reduction in Medical Savings Account (MSA) allocations for the Saver series, on 1 January 2024, gross contributions (total contributions including the contribution to the MSA) will increase by:-
• 12.9% on the Executive plan and Coastal Core
• 11.9% on Classic Comprehensive
•10.9% on Key Care Plus
• 9.9% for all other Key Care plans (excluding Key Care Plus), Priority and Core
• 8.9% on Smart plans (excluding Essential Dynamic Smart and Classic Smart Comprehensive) • 6.3% on Coastal Saver
• 3.8% on Essential Saver and Essential Delta Saver
• 3.0% on Classic Saver and Classic Delta Saver
Essential Dynamic Smart will have no increase for 2024, and Classic Smart Comprehensive will have an 11.9% risk contribution increase, as well as the addition of a 15% MSA, which impacts total contributions by 32%.
According to Discovery for the Saver series, medical inflation for 2024 is expected to be 9.9%, and therefore, risk contributions for the Saver series need to increase by 9.9%. However, this is not what other sources report: Consumer price index (CPI) of medical products in South Africa from March 2019 to June 2023.11.27.
The table below has an index level of 110,5 as of June 2023 and a level of 110,5 for June 2022. That converts to a 6,25-percentage increase.
According to research expert Natalie Cowling, “As of June 2023, the Consumer Price Index (CPI) in South Africa, an economic indicator providing information on the change of prices over time, was measured at 110.5 points regarding medical products. This is an increase of 6.5 points from the previous year.”
In addition to the increases stated above, Discovery also alluded to the following.
How will the MSA allocations on DHMS be impacted in 2024? MSA allocations for the Executive, Comprehensive, and Priority plans will remain unchanged for 2024. The MSA will increase in line with the risk contribution increases:
• The MSA on the Executive plan will increase by 12.9%
• The MSA on the Classic Comprehensive plan will increase by 11.9%
• The MSA on the Priority plans will increase by 9.9%. The MSA allocations for the Saver series will be reduced in 2024. As a proportion of total contributions, the MSA allocation will reduce from:
• 25% to 20% for Classic Saver and Classic Delta Saver
• 20% to 15% for Coastal Saver
• 15% to 10% for Essential Saver and Essential Delta Saver
4. The Discovery building consists of 147 217m2 floor space (of which 134 481m2 is dedicated office space) and is made up of well-designed spaces intended to foster an environment of creativity, innovation, and collaboration. There are various standards across the globe for ergonomic requirements for the surface of administration and office space. The Netherlands Standards ergonomic requirements for the surface of (workplaces in) administration and office space the “NEN 1824:2010” describes how many square meters of office space you need per person.
According to them, one will need 7 square meters a person. Many other designers suggest that 10 square meters an office worker is closer to the mark. Discovery stated that they had 5 000 employees in 2017, therefore, their office space requirement would be approximately 35 000 square meters or at the most 50 000 square meters. They built 75 000 to 100 000 square meters more than their immediate requirement! Currently, they have 12,980 in the group, how many of them work in places like the UK is not certain. With the arrival of the Covid-19 pandemic, the work-from-home must have hurt, and the building must have had a white elephant look. Many companies still have a policy that enables workers to work from home.
Discovery certainly has a moonshot idea or two, or they are the kings of an abundance mindset. The Initial rent paid was R23 000 000 per month, and now, with a minimal escalation of 5% pa, according to my calculation, the rental payable for the 2024 year has blown out to R31 000 000 per month, which translates to an astonishing R372 000 000 for the year.
Development of the R3 billion 1 Discovery Place started in 2014 with a prospective full-completion date of 2017 – which was met. Property investors Growthpoint owns 55% of the new site, while developer Zenprop will own the remaining 45%. Discovery has signed a 15-year occupancy lease on the property. Discovery entered the retail banking sector, for which the license was granted in October 2017 by the Registrar of Banks at the same time.
5. The table below is public information, and it may be a small amount for each of these directors, but to the average person, these numbers do not look well in the light of what we are discussing in this article.
The table below shows the last ten directors' dealings in the shares of the company and its subsidiaries. Could it be that they have identified the light at the end of the tunnel?
Discovery states that Trends underpinning the increasing relevance of the Shared-Value business model include:
Societies require companies to fulfil a socially progressive core purpose.
Consumers live in a technology-dominated world and seek solutions instead of services.
The nature of risk is behavioural, and solutions are becoming increasingly personalised.
The company is innovative and a leader in its field and has surprised many sceptical analysts for many years, we hope this will continue. The battle lines are drawn like never before. This company has a lot of data, so now may be a good time to run a few new “What if scenarios”- just in case. The “what” needs to come out of the box, maybe some external variables.