The New Criterion: deathcare in focus

Tim Boreham

The two ASX listed funeral operators face 'grave' concerns if the UK industry trends are replicated here. In the meantime, consolidation of the $1.1 billion local sector continues apace

Propel Funeral Partners (PFP) $3.35

Invocare (IVC) $15.04

Is a fight to the death looming for the country’s two biggest funeral operators?

On the m&a front, Invocare and the recently-listed Propel are jousting among themselves for the best acquisitions in a fragmented $1.1 billion sector ripe for acquisitions.

But they face a wider mortal struggle, if the experience of UK provider Dignity Plc is replicated here.

On January 19 Dignity shares were whacked 50 per cent after the leading provider said it would cut prices for a basic funeral by 25 per cent and – gasp - telegraph prices online to improve transparency.

It’s a different market to here, in that the British pricing pressure has been led by the not-for-profit Co-Op Group. With a 16 per cent market share, Co-Op Group has been fast in its quest to alleviate what it dubs as “funeral poverty”.

We don’t have a similar disruptor here. But the common theme is that baby boomers are more willing to quibble on price and shop around for the best deal on online comparison sites (while they’re alive at least).

Here, online funeral shopping is in its infancy, although this is changing with the emergence of sites such as gatheredhere.com and comparefunerals.com.

Given Invocare shares have fallen around 7 percent since Dignity’s announcement, investors are aware that any complacency will place high-margin traditional operators in grave danger.

Thanks to expiring boomers, at least the local the industry volume trends are, er, encouraging. Deaths in Australia grew at average annual 0.9 per cent between 1990 and 2016, with forecast growth of 1.4 per cent between 2016 and 2025 and 2.2 per cent between 2025 and 2050.

As for industry consolidation, expect Propel and Invocare to continue to lead the charge.

Only two months after listing, Propel launched a takeover offer for Norwood Park, a public unlisted company and proud owner of Canberra’s only crematorium.

Invocare launched its own offer a couple of days later. While this $15m bid pipped Propel’s $13.65m offer, Propel on Monday said it had control of 61.8 per cent of Norwood’s register.

Norwood Park is a small morsel in the total scheme of the ‘death care’ industry, but a tasty one given it owns the nation’s capital’s monopoly incinerator. As well as Ipswich, home town of back-from-the-dead pollie Pauline Hanson, Norwood also has a strong presence in Bathurst.

For Propel, it’s the second foray in quick succession as it acquired the Brindley Group (which operates in regional Victoria and NSW) for $15.38m in December.

Invocare is thought to have missed out to Propel with the Auckland-based Davis Funerals, which Propel acquired last May.

The offer for Norwood Park is certainly consistent with Propel’s playbook, which has made 24 acquisitions since it was founded in 2011 by an investment fund set up by former DB Capital Partners Albin Kurti and Peter Dowding (Propel is externally managed by this entity).

Over that time, Propel has increased the number of funerals handled from 278 a year to 6054. The company targets 9907 funerals this year, across 80 facilities. With a 4.1 per cent market share in Australia and 6.7 per cent in New Zealand, Propel is a distant second to Invocare, which commands 39 per cent of the local market and 19 per cent of all Kiwi despatches.

Propel’s brands – some of which have been around since the late 1800s – include Millingtons of Hobart and Gympie Funeral Services. Notably, Propel does not currently operate in Melbourne, Sydney, Adelaide, Canberra, Wellington or Christchurch.

Invocare recently admitted that it could not rely on acquisitions for growth because of its dominant share of key markets including Sydney. In life as well as death, the completion regulator wants consumers to have adequate choice.

Canberra authorities recently rejected a push for a second publicly-owned crematorium (of course many argue that wasn’t necessary because the whole town is a mausoleum anyway).

According to Invocare chief Martin Earp, Norwood Park perfectly fits the company’s geographic “infill” strategy unveiled as part of last year’s $200m Protect and Grow strategy. Still, Invocare’s growth can’t come from big-hit metro acquisitions, a constraint that Propel plans to exploit.

There’s still plenty to buy, given the industry still populated by family operators across 1200 establishments. As with the overall baby boomer trend, many of the proprietors have one foot in the grave themselves and are eyeing an exit strategy.

Propel shares have surged per cent since the company listed on November 23, after a $130m raising at $2.70 apiece. Invocare shares have gained sevenfold since listing in December 2003, with the stock trading at a 50 per cent premium to the broader market.

Both Propel and Invocare are ‘expensive defensives’, trading on an earnings multiple of 30 to 33 times (roughly double the average for ASX industrial stocks). While their business mix slightly differs, both operate on similar operating ebitda margins of 25-26 per cent.

Arguably, Propel has the better prospects simply because Invocare is so much bigger already. At its half-year results in August, Invocare reported losing market share in Queensland, NSW and WA because of price competition. However overall revenue grew 1.7 per cent to $218m, while operating ebitda climbed 9.9 per cent to $51.9m.

Invocare boasts a market valuation of $1.7bn compared with Propel’s $328m. But expect this gap to narrow as Propel acquires in Invocare’s prize metro markets.

Propel has a $50m cash stockpile and no debt, so it can gear up if it really wants to get serious.

Tim Boreham edits The New Criterion

Tim.boreham@independentresearch.com.au

Disclaimer: The companies covered in this article (unless disclosed) are not current clients of Independent Investment Research (IIR). Under no circumstances have there been any inducements or like made by the company mentioned to either IIR or the author. The views here are independent and have no nexus to IIR’s core research offering. The views here are not recommendations and should not be considered as general advice in terms of stock recommendations in the ordinary sense.


Tim Boreham

Many readers will remember Boreham as author of the Criterion column in The Australian newspaper, for well over a decade. He also has more than three decades’ experience of business reporting across three major publications.

Expertise

small caps ASX:IVC ASX: PFP

Comments

Please sign in to comment on this wire.