One neat investment theory of the pandemic era is that the deathcare industry provides the perfect hedge against the human cost of the pestilence and the ensuing economic chaos.

But as with having blind faith in gold as a safe harbour, the notion of funeral parlours as a defensive certainty should be dead buried and cremated.

This month’s profit results from the listed Invocare (IVC) and Propel Funeral Parlours (PFP) show that while the virus toll is mounting – and no thanks to Victoria – other factors are keeping mortalities down.

For an industry predicated on fixed costs such as facilities, an ill wind bloweth.

One ‘problem’ is that social distancing and masks mean that influenza rates have plummeted – by as much as 95 per cent, according to Propel.

So too have vehicle fatalities: nationally they’re down about 70 (10 per cent) year to date, while in mobility-deprived Victoria the decline is more like 20 per cent.

The other headwind is revenue per funeral has declined, partly because of limits on mourners. While these largely have been lifted, but in delinquent Victoria a maximum of ten people can attend (including the celebrant, but not the deceased).

In New Zealand, where both companies operate, a similar limit has been re-imposed in Auckland.

Australia’s biggest funeral operator, Invocare reported first (June) half net profit decline of 48 per cent, to $48 million.

Management estimates the overall Aussie death rate declined 2-4 per cent year on year, which is below actuarial assumptions.

Put in context, about 150,000 Australians drop from their perch annually, but small percentage differences can affect the funeral operators given their high fixed costs.

A key stat is that Invocare’s case volumes fell 3.5 per cent to 22,077 funerals, but group revenue fell more than 6 per cent to $226 million.

Fewer mourners mean less of a cut on sandwiches, condolence books, flowers, tissues etc and it all adds up. The lack of an ‘audience’ means more bereaved families are opting for direct cremations and foregoing snazzy caskets.

Propel fared notably better, this week disclosing a 6 per cent profit boost to $14.2 million, with volumes increasing 17 per cent to 13,299.

One proviso is that unlike Invocare’s numbers, Propel’s are for the full year and reflect less of the virus-affected period. Adjusting for acquisitions and other factors, volumes were down about 2.2 per cent and revenue was flat.

Propel’s more granular numbers show that average revenue per funeral stood at $5756 in the year to March 2020, but slumped to $4972 in April. But by June 20 the number had rebounded to $5862.

With a circa 25 per cent market share, Invocare has a stranglehold on the fragmented sector via names such as White Lady, Simplicity. It also has a Singaporean presence.

Unlike the clients, the sector is down but not out. The benign flu season aside, the coronavirus has deterred patients from medical consultations and this is likely to result in an uptick of cancer and heart mortalities because of late diagnosis.

And unless the actuaries are wrong – and on mean weighted average they’re not – the death rate will revert to the mean over time.

Invocare in April replenished its coffins – er, coffers – with a $270 million capital raising. That’s just as well given the company’s high gearing and a much needed $200 million refurbishment drive.

Some investors were surprised the company declared a 5.5c a share interim dividend.

While Invocare points to a “subdued” second (December) half Propel is more effusive, declaring itself “well placed to navigate COVID-19 disruptions and uncertainties.”

Performance wise Propel shares take the honours: they gained 11.5 per cent between listing in November 2017 and June 30 balance date.

Over that time the ASX300 index retreated 1.4 per cent, while Invocare shares shed 41 per cent (they’ve since lost a further 8 per cent).

Over the longer term, both companies face the challenge of younger consumers preferring less traditional forms of dispatch such as eco-coffins, alternative services or even the Hunter S Thompson option of firing one’s remains from a cannon.

But just as the operators have adapted to the Covid-19 virtual funeral era, they will adapt again to shifting consumer demand.

After all, it’s not rocket science: just make sure the flowers arrive on time, the name of the deceased is spelt right and the hole is dug big enough.

Tim Boreham edits The New Criterion

tim@independentresearch.com.au

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