The flow-on effects from the coronavirus changes are impacting a lot of industries. Perhaps the funeral services sector might not be impacted in the way an investor would initially think...  

While the media talk about deaths from COVID-19 every day, the reality is that countries like Australia and NZ are doing extremely well in beating the virus (very low case numbers and deaths). In fact, the lockdown of the mass population and greater adoption of preventative healthcare will likely see significantly reduced deaths from traditional causes such as the upcoming flu season. 

With record levels of people opting to get the flu vaccination in 2020, it should significantly reduce the number of deaths caused by influenza (currently 12th in leading causes of death in Australia - ABS). Vaccinations, along with travel restrictions and other preventative measures like social distancing, have a positive side effect for humanity. By reducing the risk of death from other traditional causes. Overall, people are being far more cautious due to the virus and it should drive the death rates down significantly in 2020 and perhaps 2021. 

To make matters worse (for the funeral industry) is that the government has currently regulated that no more than 10 people can attend funerals. Given the increased risks around COVID-19 (particularly in the elderly). It's likely that even once the restrictions have been lifted, more people may still be opting for cremation over a traditional funeral. This makes a material difference to the funeral operator earnings as cremations are typically a much cheaper, lower margin service offering when compared to funerals.  

So while death volumes in Australia have historically grown by around 1% p.a. due to an ageing population, one would typically think this is a great sector to have exposure to... death is inevitable after all and with a growing population, it has had a favourable tailwind.

However, It could be a tough few years ahead for the funeral industry should people remain cautious and continue with vaccinations and social distancing. As an example, 2018 actually saw negative death rates YoY due to a milder winter and effective flu vaccinations. 

With large fixed costs, funeral services operators are sensitive to changes in death volumes. To put this fall in perspective, a fall in death rates in 2018 led to a double-digit EBIT decline at Australia's largest funeral services operator, Invocare (IVC AU). This then translated into a -45% decline in the share price... 

ABS Death rate data is current up to 2018

With more debt added to the balance sheet over the last few years. Invocare was planning to protect and grow its dominant position in the Australian funeral market. However, after the recent COVID-19 equity raising to sure up the balance sheet, they might be having second thoughts and rather starting to worry about a reversal of fortunes in what has traditionally been a highly predictable and growing market. 

The combination of falling death rates, pricing pressures and a shift towards lower-cost funeral offerings could see a favourable tailwind, turn into a headwind for the funeral home industry in the years ahead.

So while death is inevitable, profiting from it is anything but... 

FiftyOne Capital is a global long/short fund domiciled in Australia. The fund currently has positions that may benefit from a fall in share prices of funeral home operators. This is not investment advice and investors should seek professional advice before acting on any of the information provided in this article. 



Mark White

Interesting thesis, particularly after reading the current article promoting IVC from the Morningstar weekly newsletter . I guess we will see who's closer to the ball in good time!