Two Funeral Stocks Under Investors’ Radar – IVC, PFP

The populations in the core geographical markets of Australia, New Zealand and Singapore are growing and ageing, with the first wave of the so-called baby boomer generation now impacting on anticipated death volumes. Currently, it is challenging for funeral and memorial service providers to recognise the changing demands of client families as there is a strong movement away from religious services designed to mourn the death, towards a more contemporary celebration of the life lived.

Projected number of deaths in Australia

(Source: ABS Population Projection 2017)

We have identified two stocks which have been benefited from the rising death numbers. Let’s take a closer look at these stocks and their recent results.

InvoCare Limited (ASX: IVC)

Funeral service provider, InvoCare Limited, has released its full year 2019 results today. For the period, the company reported operational EBITDA growth of 21.4%, driven by the increasing number of deaths in 2019. The results were also driven by the strong performance from the renovated locations delivering 8.5% improvement in EBITDA over un-renovated locations while the benefit of recent acquisitions delivered an additional $4.3 million EBITDA in 2019. The performance of the recent regional acquisitions has exceeded the management expectations, representing the strength of the teams within these businesses and the strong underlying demographics in these regional markets.

Following the release of the full year results, the company’s stock witnessed an uplift of 9.804% during the day (AEDT as at 1:20 PM).

The company has declared a final dividend for the financial year 2019 of 23.5 cents per share fully franked compared to 19.5 cents in 2018 and bringing the full year dividend to 41.0 cents per share, which represents a 79% payout of operating earnings. The dividend has a record date of 5 March 2020, ex-dividend date of 4 March 2020 and a payment date of 17 April 2020.

FY19 Results (Source: Company’s Reports)

Notwithstanding the strong headline Group performance, the traditional funeral business continues to face the longstanding headwind of declining market share. As previously reported, this was the main driver behind the company’s Protect & Grow strategy. This loss of market share has been driven by ageing locations, changing customer needs and the need to transition new local leaders into the operational business. Till now, Protect & Grow has been a success but whilst it is being implemented it does negatively impact performance due to the closure of locations for renovation, ramp up post reopening and the rollout of the new ERP system. The combination of these factors resulted in year on year comparable EBITDA growth of 4.7% in Australian Funerals and a decline of 12.6% in New Zealand.

Going forward, the company expects its Operating EBITDA to be around $14 million in 2020, assuming current customer repayment schedules. The current estimates for 2021 and 2022 are around $12.5 million and $11 million respectively.

The company is expecting following things for 2020

• a continuation of the revision to trend in the number of deaths across the company’s three markets;
• case average growth of c.2%
• disciplined cost control across existing business
• continued positive contribution from acquisitions
• estimated NBO drag of c.$4 million EBITDA

At the time of writing, IVC’s stock was trading at $14.015 with a market cap of $1.49 billion. The stock is trading at a PE multiple of 23.100x with an annual dividend yield of 2.9%.

Propel Funeral Partners Limited (ASX: PFP)

Propel Funeral Partners Limited is into the operation of funeral homes, cemeteries, crematoria, and related assets, serving individuals and families in Australia and New Zealand. Today, the company’s stock has witnessed an increase of 3.989% during the day’s trade.

The company’s financial results in FY19 (year ended 30 June 2019) continued its track record of delivering revenue and earnings growth. Despite below trend death volumes in the first half of FY2019, Propel’s financial performance was resilient, with revenue growing by 17.6% to 95.1 million dollars, on the back of an 11.8% increase in funeral volumes. Over the period, Average Revenue Per Funeral was up 1.4% and, on a like for like basis, increased by 2.8%. Operating EBITDA grew 10.6% to 23.8 million dollars and Operating NPAT increased 8.1% to 13.3 million dollars. In FY19, cash conversion remained strong at 97.4%, slightly up on the prior year, with operating cash flows growing by 12.3% to 23.2 million dollars.

For the period, the company declared total dividends of 11.5 cents per share fully franked in connection with FY19, reflecting a payout ratio of approximately 78% of Distributable Earnings. The company ended FY19 with net debt of $7.6 million. In August 2019, Propel expanded its senior debt facilities to $100 million, the majority of which has been deployed or committed.

For the three months ended 30 September 2019, the company’s financial results were materially above the prior corresponding period. “Propel has made a positive start to the new financial year and we expect death volumes will continue to revert to long term trends” said Managing Director of the Company - Albin Kurti while commenting on the quarterly results.

During the quarter, the company performed a record number of funerals, with comparable and total funeral volumes higher than the previous corresponding period (pcp). During the period, the company achieved Average Revenue Per Funeral growth on FY19 within its target range of 2% to 4%. Over the period, the company generated significant growth in revenue, Operating EBITDA and margins over the PCP.

The company expects to release its H1 FY20 results on 27^th February 2020.

At the time of writing, PFP stock was trading at $3.650 with a market cap of ~$346.56 million.

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