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 MARKET REPORTS |
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Analyst report - shares
Funeral stock glowing with good health
December 17, 2007
Tim Morris, wise-owl.com analyst
Stock: Invocare
Recommendation: BUY
Code: IVC
According to an age old saying, there are three certainties in life – birth, taxes and death. Around the latter of these phenomena, an entire industry has evolved whose fundamentals are supportive of steady, reliable growth in light of Australia’s aging population.
The business of running funerals and cemeteries is a field that most of us would prefer to ignore, and this lack of glamour has left Invocare (IVC) as the only Australian listed company in the ‘death care’ industry.
Invocare is Australia's largest provider of funeral services, operating the White Lady and Simplicity funeral brands. Invocare also operates a stable of well-established state-based funeral homes, including Guardian, Le Pine, Purslowe and George Hartnett.
The majority of the company’s 124 funeral homes are owned, with only 40 leased. The company also operates 12 cemeteries and crematoria, all but one of which it also owns.
In an environment where the overall market’s future direction can be uncertain, Invocare provides a defensive opportunity given its malign operating environment and inelastic demand for its services. However, in the context of our aging population, the Australian Bureau of Statistics has forecast future death rates to exceed historical trends and grow at around 1% pa. By catering for all types of backgrounds and religions, the trading outlook for Invocare is favourable.
Death rates are expected to grow thanks to our aging population. Source: IVC
Invocare is perfectly positioned to take advantage of these trends given its leading position with a 20% share of the funeral services market. In major capital and regional centres, this share increases to 30%. Invocare’s dominant position puts the company in a prime position within the fragmented funeral services industry. Invocare’s nearest competitor is a private equity operator, with only a 6% share of the market.
The rest of the industry is made up of small family owned businesses. The grim nature of the industry can make it difficult for an owner to convince the kids to follow in their footsteps, which makes succession planning a problem. However as retirement approaches, Invocare can solve such dilemma’s by offering a logical and appealing exit strategy for small operators, meaning that there remains a lot of room of for growth via acquisitions.
However the company’s steady but reliable organic growth opportunities can’t be ignored. Revenues are forecast to grow at 4-5% pa for the next 5 years, supported by death rates, expanding market share, growing pricing power, and a focus on cost control.
Another driver of growth in recent times and moving forward will be the company’s prepaid funeral packages. Currently pre paid funerals account for 13% of revenue’s, where the sales are only recognised when the funeral service is performed. Until such time, the funds received are placed into a trust and invested.
If invested wisely the gains from these funds provide an additional opportunity for growth, however they also add another dimension of risk, reducing the stocks otherwise overwhelming defensive qualities. At June 2007, funds under management stood at $267m, providing a $56m surplus over the estimated cost of delivering future contracted funerals. If maintained, this surplus will be recognised in earnings in the years ahead upon the delivery of service, but its value can fluctuate with that of the underlying investments.
The returns to date have been respectable with 57% of the funds invested in Australian equities. A long term investment view is taken in line with the average 10 year period between contract sale and redemption. On funds under management, Invocare’s has a achieved a 17.9%, return over the last year, 16.3% over the last 3 years, 12.4% over the last 5 years, and 10.1% over the last 7 years.
The company itself saw profits grow by 19% in the last financial year and EPS by 17.6%. The stock is currently trading on a PE of 29, almost double the market average. This ‘PE premium’ reflects Invocare’s unique position as the only listed player in its industry and strong defensive qualities. The premium also reflects the market’s positive view of Invocare’s offshore expansion opportunities, which could be warranted in light of the success achieved so far in Singapore. The Singaporean market is even more fragmented than Australia, and Invocare has grabbed a 10% market share, well ahead of its nearest competitor at 2%.
Tim Morris is an analyst at wise-owl.com, one of Australia's leading independent stockmarket research houses. Click here for your complimentary report.
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Please note that CompareShares.com.au simply publishes analyst reports on this page. The publication of these reports does not in any way constitute a recommendation on the part of CompareShares.com.au. You should seek professional advice before making any investment decisions.
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