Longer Wait for Dividends Sinks South Africa Insurer’s Stock
(Bloomberg) -- Discovery Ltd.’s shares slid the most since the height of the pandemic last year after the South African insurer said it will withhold dividends and contribute additional capital for its investment in China’s Ping An Health Insurance.
The Johannesburg-based company said Thursday it will refrain from returning money to shareholders after not paying a dividend since the global health emergency. It blamed “the uncertain and potentially volatile economic environment caused by the Covid-19 pandemic.”
The news sent Discovery’s shares down as much as 10.2% in Johannesburg, before they pared losses to 7.8%, the most since March 2020, as of the close of trading on Thursday. The stock has fallen about 21% this year, the only decline in the five-member FTSE/JSE Life Insurance Index.
Even before the start of the pandemic, South Africa’s economy was battling its longest economic downturn since World War II. While the nation is now plotting a path to better growth, its prospects are held back by the severity of its virus outbreak, which has turned out to be about five times worse than in the U.K., where Discovery also has subsidiaries.
Read more: Discovery Shores Up Life Insurance Arm as Covid-19 Claims Rise
Unlike peers such as Old Mutual Ltd., which this week said it will pay an interim dividend, Discovery is opting to bolster reserves to cope with further fallout from the pandemic.
The company will likely resume payouts when the pandemic settles and review its position each year, Chief Executive Officer Adrian Gore said in an interview.
“At this stage we are investing heavily in new businesses,” he said. “I don’t see much of a change in that and therefore I don’t see a payout of a massive dividend cover.”
The insurer reported a 7% increase in normalized profit from operations of 6.5 billion rand ($453.4 million) for the year ending in June, as it grew new business income and held onto clients. One of its newer ventures, Discovery Bank, reported a loss of 1.1 billion rand.
Discovery also said that China’s Ping An Health Insurance, in which it holds a 25% stake, requires additional capital of about 6 billion rand to meet regulatory requirements as the company expands its offering. South Africa’s largest medical-scheme administrator expects to make a contribution of approximately 1.5 billion rand, it said in a statement.
“Discovery is committed to its investment in PAH and its intention is to follow its rights in this regard,” the Johannesburg-based insurer said. It’s previously funded such investments through equity rather than debt and may may consider raising equity capital that’s ring-fenced for Ping An, it said.
China is expected to further boost health-care expenditure as its population grows more affluent and older, Discovery said. The investment abroad would give Discovery further protection from economic turmoil in its home market.
Still, the timing of the potential equity raise is poor, according to Warwick Bam, head of research at Avior Capital Markets.
“It’s a bad time to raise cash,” he said. “There are also concerns around Chinese regulation that add to the risk.”
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