The “reopening” trade mostly focuses on tourism, travel or transport infrastructure companies that will benefit as borders reopen. Funeral stocks barely mention as “reopeners”.
That’s surprising because COVID-19 has hurt the funeral directors, crematoria and cemeteries industry in Australia due to government restrictions on funeral sizes.
As the COVID-19 vaccine is rolled out, funeral restrictions will continue to ease. Higher-margin funeral services will resume, helping the industry to slowly recover over the next few years.
The market expects sluggish growth in the funeral industry for some time, judging by depressed share prices for market leaders InvoCare and Propel Funeral Partners. Both stocks offer value at current prices, but do not expect a quick share-price bounce.
I last covered InvoCare and Propel Funeral Partners in detail for the Switzer Report in January 2019. InvoCare, $11.68 at the time of that column, rallied to $16.69 in mid-July 2019. But it has fallen to $11.49 during the COVID-19-related sell off.
Propel Funeral Partners was about $2.60 at the time of my January 2019 Switzer column. Propel peaked at $3.65 in early 2020 and now trades at $3.15.
Investors hoping for a quick recovery in both stocks will be disappointed. The funeral industry is complex. COVID-19 has affected short-term revenue, but there are bigger issues at play, notably the switch to lower-margin cremations and regulatory risk.
Also, buying stocks based on expected border reopenings is dangerous. Snap closures of State borders are an ongoing risk and the COVID-19 vaccine has already been delayed. Smaller funerals and live-streamed funerals are likely for some time yet as the pandemic lingers.
Australia’s $1.5-billion funeral industry has had a tough time. The industry’s annual revenue growth over 2016-21 is minus 1.4%, estimates business forecaster IBISWorld.
Much of that was due to government restrictions on funeral sizes in the fourth quarter of 2020 and the first quarter of 2021, which reduced the average spend per funeral.
Another headwind is the rising popularity of cremations, which typically provide less revenue for industry operators compared to burials. Declining church attendance is a factor as Christians typically prefer burial services over cremations, notes IBISWorld.
A less-considered factor is live streaming of funeral services. I attended two funerals online during COVID-19. Live streaming was a good option for those who could not attend physically, or for others who wanted to pay their respects without going to the service.
Live-streaming services provided an additional revenue stream for funeral operators, but could also lead to smaller service attendance, which affects catering and other revenue lines.
Regulatory risk is another consideration. The Australian Competition and Consumer Commission (ACCC) in February said the funeral industry would be a priority focus.
ACCC Chair Rod Sims said in a speech that competition and consumer issues in the funeral-services sector have long provoked complaints from the public and governments and generated stories in the media. Not least because many consumers engage with the funeral sector at a time when they are grieving, vulnerable and thereby at a disadvantage.
Sims added: “This is a concentrated sector with some players having significant market power … there is growing criticism about the lack of price transparency for funeral services and the difficulties consumers face in making an informed decision.”
This is hardly the first regulatory review. The funeral industry has been under the competition watchdog’s gaze for years. That said, the ACCC’s latest missive on the funeral industry suggests it could become harder for large operators to acquire smaller players.
Consolidation of the fragmented funeral industry has been a growth driver for InvoCare and Propel as they mop up smaller family-owned players. IBISWorld has identified 832 businesses in the funeral industry, suggesting scope for considerable acquisition activity.
Longer term, the funeral industry is ultimately affected by the death rate. Medical advances mean people are living longer, but Australia has an ageing population.
Here is a snapshot of InvoCare and Propel.
1. InvoCare (IVC)
InvoCare has about a quarter market share of the Australian funeral industry, notes IBISWorld. It had 278 funeral-service sites, 25 crematoria, 17 memorial parks, and 13 pet-cremation services in mid-2020. Key brands include White Lady Funerals and Simplicity Funerals.
InvoCare reported a $9.2 million loss in FY20, from a $63.7 million profit in FY19. The company said funeral attendance limits and movement restrictions during COVID-19 hurt revenue.
A contraction in Australia’s death rate (down an estimated 3.3%, according to preliminary government forecasts) also affected revenue. As we stayed indoors and “masked up” in public, fewer people got sick and died.
InvoCare provided a cautious short-term outlook in its FY20 result. It said there was an “uncertain impact of COVID-19 on future years’ trajectory (for Australia’s death rate).”
Longer term, InvoCare expects Australia’s death rate over the next decade to have 2.5% compound annual growth, due to an ageing, expanding population. The company is investing in its digital capabilities and high-potential auxiliary services, such as pet cremations.
At $11.49, InvoCare trades on a forecast Price Earnings (PE) multiple of 27 times in FY22, on Morningstar numbers. The grossed-up yield in FY22 (after franking) is 3.4%.
Morningstar believes InvoCare can increase its markets share by undercutting a long tail of smaller competitors. As the industry’s largest player, InvoCare has a significant cost advantage due to its economies of scale. It can also invest more in digital services and cremations.
Morningstar has a fair value of $15.30 for InvoCare. I’m not as bullish in the short term, but believe InvoCare offers value for long-term portfolio investors. COVID-19 has created a buying opportunity for investors who can weather a few more tough years for InvoCare.
Chart 1: InvoCare (IVC)
Source: ASX
2. Propel Funeral Partners (PFP)
Propel listed on ASX in November 2017 after seeking $130 million at $2.70 a share. The market initially re-rated Propel because it saw the potential through InvoCare’s performance.
With 6.3% market share, Propel is much smaller than InvoCare. Propel has 130 funeral locations and a higher proportion of cremation facilities compared to InvoCare.
The next-largest player is the Melbourne-focussed Tobin Brothers with an estimated 2-3% share, according to IBISWorld. That reinforces the fragmentation – and consolidation potential – of Australia’s funeral industry.
Some fund managers I know prefer Propel to InvoCare. They believe its smaller size means Propel will have greater scope to acquire independent funeral operators. InvoCare, with a quarter market share, might have more acquisition challenges if it reduces competition.
Like InvoCare, Propel could not offer a full range of services during COVID-19 and had lower average revenue per funeral in the fourth quarter of 2020.
However, operating net profit for FY20 rose 6.5% to $14.2 million. Propel’s first-half profit for FY21 was up 7.6% to $8.4 million – more than double the same half a year earlier.
In its Outlook statement, Propel said below-trend death volumes in 2020 should be “temporary” given the unusually benign flu season, tendency of the death rate to rebound after lower growth, and because of Australia’s ageing, expanding population.
Flu cases in the fourth quarter of 2020 in Australia were 95% below the five-year average, noted Propel in its FY20 results.
However, Propel expects COVID-19 impact on the funeral industry to continue, particularly in pandemic hotspots that enter temporary lockdown.
Propel’s performance during COVID-19 has impressed. The business is well run and funded, and has a good growth strategy. At $3.15, it’s on a trailing PE of about 21 times.
Propel is an interesting idea at the current price for experienced investors who understand the features, benefits and risks of investing in microcaps (the stock is capitalised at $315 million).
For now, I prefer InvoCare, partly because sticking with the industry leader during a period of heightened uncertainty makes sense. Both stocks appeal at the current price, as Australia’s funeral industry gets a new lease of life after the pandemic.
Chart 2: Propel Funeral Partners
Source: ASX
Tony Featherstone is a former managing editor of BRW, Shares and Personal Investor magazines. The information in this article should not be considered personal advice. It has been prepared without considering your objectives, financial situation or needs. Before acting on information in this article consider its appropriateness and accuracy, regarding your objectives, financial situation and needs. Do further research of your own and/or seek personal financial advice from a licensed adviser before making any financial or investment decisions based on this article. All prices and analysis at 21 April 2021.
