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Afrocentric vs. Discovery

Posted on 27/01/202120/01/2021 by Keith McLachlan

ORIGINAL ARTICLE APPEARS HERE.

Having listed on the JSE in 1999, Discovery Ltd (DSY) has been a phenomenal success generating early investors multiples of their money. The Group administers the Discovery Medical Aid (a separate legal entity to the listed company) and, through data mining, clever incentives and cross-selling, the Group has won huge medical aid (administration) market share, profitable growth and has built out a financial services offering from insurance to its most recent launch of Discovery Bank.

Unfortunately, trees do not grow to the sky: Discovery’s core offering is seeing strong trading down from higher- to lower-end options while the Scheme appears to have stopped winning many new members, the Group’s banking start-up is losing billions and the share price is -16% over the last three years. Finally, there remains the dark, looming presence of National Health Insurance (NHI) and potentially negative rules changes for private medical aid that leaves the Group’s core potentially vulnerable.

Interestingly (and rather quietly), a competitor has been building up in the background: Afrocentric Investment Corporation Ltd (ACT).

While dwarfed by Discovery’s R98bn market cap, inside of Afrocentric’s mere R3bn market cap lies Medscheme (with Sanlam as a strong minority shareholder) that administers a whopping 3.8m lives within its schemes (the largest being Bonitas & FedHealth). Despite the difference in the market cap, this operating metric compares favourably versus Discovery’s “health lives” of 3.5m (page 3 here).

Perhaps more interestingly, while Discovery has grown from its medical administration service into financial services, Afrocentric has steadily grown further into the healthcare market. Afrocentric’s other businesses offer a range of healthcare-related technology services, pharmaceuticals and other healthcare products, and—quite interesting—runs a near-annuity-like logistics services for the delivery of chronic medications (which it has cross-sold cleverly into many of its schemes for its members benefit).

Sources: Afrocentric FY 20 results & own workings

In fact, this move further into the healthcare value-chain has seen Afrocentric’s contribution from non-services related revenue grow quickly (+54% y/y in FY 20!) to nearly rival its original revenues (Figure 1). These revenues are ramping up profits quickly too and the “Health Products” segment saw its profits basically double in FY 20 (Figure 2).

 Sources: Afrocentric FY 20 results & own workings

Given this context, how does Afrocentric compare in terms of growth rates & valuation to Discovery (and, perhaps, Momentum Metropolitan Holdings)?

Figure 3 show that Afrocentric’s revenue has a far superior 5-year CAGR to Discovery (20% CAGR y/y versus only 10% CAGRy/y) yet the market has only rewarded the Group with a third of its Price-to-Sales (0.4x versus Discovery’s 1.5x). Furthermore, while Discovery’s Price Earnings has been blown out of the water by pandemic adjustments and its Bank’s losses, Afrocentric is sitting on a very respectable 9.1x Price Earnings with an attractive 5.6% Dividend Yield.

 Sources: Various company reports & own workings

Finally, far from NHI and the public sector’s potential encroachment on private medical aids being a threat, Afrocentric views it an opportunity. The Group is strongly empowered and, indeed, recently won the GEMS managed care contract in the public sector. If/when NHI is upon us, Afrocentric is well-positioned to manage a good—and like profitable!—portion of it.

In conclusion, perhaps it is time that the market discovered Afrocentric? Not that Discovery is a bad business, but Afrocentric appears well-positioned, faster-growing & potentially cheaper as an investment.

ORIGINAL ARTICLE APPEARS HERE.

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