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 MARKET REPORTS |
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Analyst report - shares
Stock of the week
April 28, 2008
Tim Morris, wise-owl.com analyst
Stock:Invocare
Recommendation: Buy
Code: IVC
Market Cap: $671m
Despite ranking amongst the top200 companies listed on the ASX, Invocare struggles for recognition amongst its Australian blue chip peers.
Since we last visited the stock it has been another ‘steady as she goes’ period, with revenue increasing 16.7% and net profit up 25.1% for the full year 2007. For those unfamiliar with the stock, Invocare has become a key player within an industry built around one of the three certainties in life (birth, taxes and death).
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 as the only Australian listed company in the ‘death care’ industry. Considering Australia’s aging population, the fundamentals behind this industry are supportive of steady, reliable growth.
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 due 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.
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 14.6% during 2007 and EPS by 11%. The stock is currently trading on a PE of 24, well above 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%.
The recent market correction provided a true test of Invocare’s premium market valuation, as many stocks on high PE’s saw their share prices severely punished. However Invocare remained relatively strong, holding true to the uptrend that it has established since listing in 2004. This resilience confirmed our view that the stock should be a welcome addition to a long term investor’s portfolio.
Tim Morris is an analyst at wise-owl.com, one of Australia's leading independent stockmarket research houses. Click here for your complimentary report.
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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