In an announcement on 22
nd May, the company said it would be revising the terms of retirement of former CEO Andrew Smith, about which many stakeholders raised concerns. Other key highlights of the announcement were that the acquisitions of the company have reached an inflexion point, the company registered sound financial performance despite volume challenges and the company will be testing US Markets with the establishment of InvoCare USA.
Growth Opportunities (Source - Company Reports)
The company has changed its policy with respect to acquisitions. So far acquisitions have played a great role in the success of the company. The company completed acquisitions in Auckland market last year, which have been integrated in InvoCare’s operations and have started yielding results. Later in 2014 the company acquired businesses in Melton Victoria, which added an outer western suburb location to the network in Victoria. In New Zealand the company remains on track to acquire two memorial parks. The company acquired a business-to-business cremation operation in 2014 to facilitate the provision of cremation services in the relevant markets.
Revenue Trends (Source - Company Reports)
But going forward regulatory hurdles means that the company will be focusing more on creativity and innovation in existing businesses. The company plans major investments in digital initiatives with the aim of improving the service offering for clients and improving the professionalism of the staff to ensure the highest level of care is delivered to the families at a most difficult times. Further major property developments are planned for 2015 including the last of the rectification works done for earthquake damages sustained by InvoCare facilities in Christ Church, New Zealand.
Gross Sales by Country (Source - Company Reports)
The company has also started operations of InvoCare USA from a base in southern California serving the San Diego, Orange County and Los Angeles Region. A senior executive from a major US funeral service company leads the operation. It is a low risk and low cost operation based around mobile operators providing a range of services typically provided in Australia and New Zealand and Singapore and generally not offered by funeral homes in the USA.
Market share Growth (Source - Company Reports)
The key brands of the company are White Lady Funeral and Simplicity Funerals. White Lady Funerals is a dedicated team of women offering a unique service for our client families with a woman’ understanding. The life of the loved one is honoured with special nurturing, sensitivity warmth and care. There are 56 White Lady location throughout Australia. On the other hand, Simplicity Funerals offers practical, dignified, respectful and affordable funeral services. Steadily expanding, there are 58 Simplicity Funeral locations throughout Australia, New Zealand and Singapore,and a growing number of mobile arrangers servicing areas lacking Simplicity representation.
Invocare Daily Chart (Source - Company Reports)
The growth pillars of the company are demographics, average contract values, market share improvements, pre-paid funeral business, new locations, business acquisitions and operating leverage improvements. The number of deaths have been up estimated at 3.2%, while market share of the company continues to be solid (the company arrested the decline in market share that was happening in 2013). Net profit of the company improved by 11.4% from 48.9 million dollars to 54.5 million dollars. However the net profit after tax included after tax benefits from net impairment reversals of $0.4 million, benefit from asset sales gain of $0.3 million and non-cash undelivered prepaid impacts of $7.6 million in gains. The company continued strong EBITDA to cash conversion of 106% and dividend payout remains high at 87% of operating earnings after tax. Total shareholder returns since the listing of 2003 has been 23.5% till Mid April 2015.
However company registered a modest 7.2% increase in sales in 2014 and an EBITDA increase of 6.3%. Funeral case volumes increased by 4.4% and funeral case averages increased by 3%. Operating earnings after tax increased by 8.7% in 2014. Over a five-year period the revenues of InvoCare have increased from 267 million to 413 million, which is an increase of 54% over a five-year period. This is a modest growth number. The company’s operating EBITDA margin has declined from 26.3% to 24.5% over the same period. The company’s prepaid contract sales as a percentage of prepaid redemptions have decreased from 20% to 8%, from 2010 to 2014. The company’s growth is also contingent on number of deaths in the market in which it operates, which is an externality beyond company’s control. The company has not been able to increase its market share and lost market share till recently which was attributed to a decline in marketing expenditure and change in key personnel in certain locations.
The company is currently trading at a stock price of $12.440, which is somewhere close to the 52 week high of 14.170 and further from the 52 week low of 19.840. At the current price the company is trading at a Price to Earnings multiple of 28.53 and a dividend yield of 2.9%. There are other companies in the sector are trading at a better combination of P/E ratio and yield (Price to earnings ratio of less than 20 and dividend yield of more than 5%).
Given the modest growth numbers achieved over the period of last five years, limited increase in market share, revenue increase being contingent on externalities and the high Price to earnings multiple of the compay, we believe that the stock is expensive at the current price of $12.05.
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