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InvoCare up despite fall in number of deaths

Lex Hall  |  22 Feb 2019Text size  Decrease  Increase  |  
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Australia's largest funeral provider InvoCare is trading more than 8 per cent higher despite a dip in revenue linked to a milder winter and effective flu vaccinations.

InvoCare today posted a 4 per cent fall in earnings before interest, tax, depreciation and amortisation, citing an abnormally low number of deaths because of a milder winter and a less severe flu season.

The company, which boasts about a third of the market share, has also temporarily closed several funeral homes for renovations.

a cemetery under grey skies

Year-on-year variations in the death rate can cause some short-term earnings volatility

At 1.45pm Sydney time, InvoCare was up 8.35 per cent at $13.63 – a 15 per cent discount to Morningstar's fair value estimate of $16.

Total revenue for the 12 months to 31 December rose by 1.4 per cent to $477.3 million from the previous year reflecting successful acquisitions and sales within its cemeteries and crematoria business.

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According to InvoCare's full-year report the number of deaths across Australia in 2018 was 3.1 per cent lower than the previous year, following a mild winter and effective flu vaccinations.

InvoCare carries a wide moat – or sustainable competitive advantage, according to Morningstar analyst Daniel Ragonese, who notes that year-on-year variations in the death rate can cause some short-term earnings volatility.

Ragonese said he was encouraged by management's assurances that the business is showing improvement in the final quarter and into January.

"While this is a soft result, it’s in line with recent guidance," Ragonese said. "Morningstar is confident that these challenges will be overcome in the coming years and the number of deaths will revert to more normalised levels.

The board cut the final dividend by 29 per cent to 19.5 cents, down 8 cents from a year ago.

This is chiefly to preserve the balance sheet, Ragonese says.

In 2018 InvoCare acquired 11 businesses in Australia and New Zealand, which added more than 3,500 funeral cases, 1,200 cremation cases and about $26 million in annual revenue.

At the same time, it is undertaking a major refurbishment program, Protect and Grow 2020, which aims to optimise the brand portfolio and modernise its funeral homes and cut costs.

"While this is disruptive in the near term, it helps sets up the company for longer-term success and should support market share gains and earnings growth," Ragonese said.

Statutory net profit fell by 57.7 per cent to $41.2 million. Ragonese says this is explained by a lower return on the prepaid funeral investment portfolio.

"Each year a portion of InvoCare's sales are for prepaid funerals. The payments are made up front and these funds are invested in a diversified portfolio and in some point in the future the funeral service is provided," he says.

"The investment returns on this portfolio undoubtedly will fluctuate from year to year and while this affects the statutory earnings, as it has in this 57.7 per cent decline, it's not a true reflection of the underlying performance of the business."

is senior editor for Morningstar Australia

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