2 ASX-listed Funeral Stocks amid Market Mayhem

2 ASX-listed Funeral Stocks amid Market Mayhem

Funeral service providers are not dead yet. Investing in funeral stocks could be a decent option while you are still above the ground. The funeral industry is resistant to recessionary fears and thus offer the advantage of stable and consistent returns for the investors. The current global markets scenario makes the industry look all the more attractive to investors. However, the competition in the funeral services market is on the rise, and therefore, it is imperative to check the reputation and financials of the company before investing.

The companies in this industry are generally perceived in an unpleasant light, but the services and products that they offer are vital. The industry is in a mature phase, and the revenue is usually determined by incremental price increases, death rate, the condition in the broader economy and product mix. Despite the stability, the long term-prospects for funeral stocks highly depend on the aging baby-boom generation. The population of New Zealand and Australia are rising and ageing, with the first surge of the baby boomer generation reflecting in the increased number of deaths. This increase in demand profile is forecast to continue in the next couple of decades.

Let’s glance at two ASX-listed funeral stocks – PFP and IVC.

Propel Funeral Partners Limited (ASX:PFP)

Propel Funeral Partners Limited is engaged in the operation of cemeteries, funeral homes, crematoria, and related assets, assisting families and individuals in Australia and New Zealand. The company is the second largest death care service provider in the region.

Impressive 1HFY20 Results

For the six months ended 31 December 2019, the company reported total revenue of $57.0 million, up by 21% compared to pcp. Operating EBITDA was up by 42.1% to $16.6 million, and operating margins were up by 430 bps, led by higher funeral volumes and average revenue per funeral growth.

However, NPAT was down by 47.5% to $3.4 million, negatively impacted by AASB 16, $1.4 million of acquisition costs and $4.1 million Performance Fee earned by the Manager. PFP declared a fully franked dividend of 4.0 cents per share, which will be paid on 06 April 2020. In 1HFY20, the company performed 6,646 funerals, up 17.8% compared to pcp and the company’s average revenue per funeral was $5,764 in 1H FY20, up 3.2% on FY19.

Key highlights for 1HFY20 (Source: Company’s Report)

Acquisitions to Support Future Growth

In 1HFY20 the company acquired:

  • The entire issued share capital of Gregson & Weight Pty Ltd, three substantial freehold properties and a parcel of vacant land on the Sunshine Coast in Queensland.
  • The business, assets and specific freehold properties relating to Grahams Funeral Services Limited in the North Island of New Zealand.
  • Two freehold properties previously tenanted by the company.

Outlook for FY20

The company is witnessing positive trading momentum, which was built in the first half, with the total funeral volumes materially higher than the previous corresponding period during the first seven weeks of 2020. The growing and ageing population, and the recently expanded funding facilities will benefit the company going forward.

Stock Performance

The stock of PFP closed the day’s trading at $2.900 per share on 18 March 2020, an increase of 1.754% compared to its previous closing price. The company has a market capitalisation of $281.4 million, and the total outstanding shares of the company stood at 98.74 million. PFP’s 52-week low and high is $2.770 and $3.800, respectively. Propel has a P/E ratio of 30.190x.

InvoCare Limited (ASX:IVC)

Headquartered in Sydney, InvoCare Limited is a leading provider of funeral services across New Zealand, Australia and Singapore. The company seeks to deliver future growth by focussing on adapting offerings to meet the needs of client families. IVC has ~1,800 employees and manages approximately 290 funeral locations.

Robust FY19 Results Driven by Growth Initiatives

For the full year 2019, the company witnessed strong bounce back in operational EBITDA with a growth of 21.4%, led by an increase in the number of deaths and a solid performance from renovated locations. The advantage of the latest acquisitions produced an additional $4.3 million EBITDA.

The operating margin of the company stood at 29.2%, up by 430 bps compared to FY18. The strong growth in results was mainly driven by the positive impact of investment in the Protect & Grow strategy. In FY19, the company completed the renovation of 106 locations with more plans to renovate 74 locations in 2020 and accelerate rollout.

Financial Highlights (Source: Company’s Report)

Funeral Business Outlook

The traditional funeral industry is currently experiencing e longstanding headwind of declining market share, and this is a crucial driver for growth behind the Protect & Grow strategy. This loss of market segment has been led by changing customer needs, ageing locations and the need to move new local leaders into the functioning business. Protect & Grow segment has been a success to date. Still, while it is being applied, it does adversely impact performance owing to the closing of sites for the ramp up after renewing,  renovation and the launch of the new ERP system. The mixture of these issues resulted in YoY comparable EBITDA decline of 12.6% in New Zealand and a growth of 4.7% in Australian Funerals.

Stock Performance

The stock of IVC closed the day’s trading at $13.720 per share on 18 March 2020, a decline of 0.652% compared to its previous closing price. The company has a market capitalisation of $1.62 billion and the total outstanding shares of the company stood at 117.18 million. IVC’s 52-week low and high is $12.330 and $16.770, respectively. InvoCare has an annual dividend yield of 2.97% and a P/E ratio of 30.190x.

Bottomline

The funeral industry is appropriate for investors that are pursuing income and stability for the long term. The companies that are operating in this industry have a constant flow of business, regardless of the level of seasonality. However, it is a mature industry and not one for growth. The companies of this industry do not influence the death rate, putting them with limited alternatives to increase revenues and earnings apart from strategies such as incremental price rises, operating margin expansion and acquisitions.


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