Discovery’s 10% share price plunge explained

Discovery’s latest results showed a strong performance for the company, with solid profit and earnings growth. However, the day these results were released, the insurance giant’s share price declined by almost 10%.

This market reaction took many analysts by surprise as, on the surface, Discovery seemed to have shot the lights out.

In fact, Discovery’s share price jumped when the company released its pre-results trading statement on 3 September, showing an expected basic earnings increase of between 23% to 28%.

The company’s share price shot up by over 6% between 2 September and 10 September.

On 11 September, Discovery released its full results, which showed a 10.7% increase in insurance revenue and a 10.7% increase in non-insurance revenue. On top of this, the group reported a 27% increase in its profit for the year.

However, unlike the trading statement, this release was met with opposition from shareholders, and the company’s share price fell by almost 10% during the trading day up to the close of market.

Some analysts attributed this to Discovery’s share price simply having run ahead of the results release following the trading update.

PSG Hole in One Ruimsig’s Ricus Reeders told BusinessDayTV that, while Discovery’s results are always “an exercise in actuarial science”, he could not see anything bad enough to warrant this market reaction.

“Just taking a look through all the various metrics or ways of recording earnings, I couldn’t see anything bad in there,” he said.

“I really think it is just a case of the share price running ahead of these results. I mean, they were sitting at a historic price-to-earnings ratio of 18. Compared to the rest of the market and that sector, it’s pretty high.” 

“I think it’s just expectations running ahead of the results, but nothing bad that I could see in those results.”

Also speaking to BusinessDayTV, Oyster Catcher Investments’ Mark du Toit attributed part of the market reaction to a disappointing outlook from Discovery.

“They’re guiding for earnings growth of 15% to 20%, which is actually really good. But when you’re coming from 29% earnings growth, that’s maybe slightly weaker than some were expecting,” he said.

“There’s also a little bit of an assumption change, which meant that they wrote down some of their embedded value.”

“But those are really the only two negatives that I could find. Otherwise, it seems like the group is in good health, and I mean, what’s not to like about earnings growing at 15% to 20%? It’s pretty robust.”

UBS said the drop was linked to weaker-than-expected contractual service margins, indicating lower expected future profit from insurance contracts.

Paper profits

Daily Investor analyst Drikus Greyling decided to examine Discovery’s results more closely to try to explain the market’s reaction.

He found that, upon closer analysis, the majority of Discovery’s profit growth came from fair value gains, with the company reporting a R25.8 billion fair value gain across its business units.

Discovery Invest was by far the largest contributor to this significant fair value gain. The increase in Discovery Invest’s fair value gain was R17.1 billion for the 2025 financial year.

The problem with fair value gains is that they are only profits on paper. They represent a valuation increase in some of the company’s assets, but do not represent any actual realisation of profit or cash flow.

The problem extends further, as many investors and analysts cannot test the veracity of those valuations that caused the fair value gains. 

In this case, however, 73% of the financial assets are traded on the stock exchange, but still do not represent a cash inflow to the business.

It is also important to note that a large amount of the asset value increases are also offset by increases in financial liabilities which amounted to around R21 billion.

This could explain the nearly 10% decrease in Discovery’s share price on the day the results were released. The company’s share price has since partially recovered and is up 8.45% in the year to date.