Being bombarded by funeral-insurance ads is a downside of going to the gym each afternoon. As I watch TV on a running treadmill, every ad break has a promotion for funeral insurance.
Who knew funeral insurance was such big business? Or that late afternoon was the time when people think of the burden of leaving funeral costs to their loved ones? Or that enough people even care if their children pay for a funeral as they inherit their parent’s wealth.
Funeral-insurance ads are yet another sign of the expanding death-care services market in Australia and New Zealand. Funerals, cremations, coffins, memorials, headstones, insurance and various other death-care services are big business.
Australia’s death-care industry is estimated at $1.1 billion in FY2017. New Zealand’s death-care industry is worth about a quarter of that.
Investors rate death-care stocks for four main reasons. First, the key driver of industry revenue – the death rate – is reasonably predictable and defensive. It’s a given that most Australians will need thousands of dollars of death-care services when their time is up.
Second, the death rate is rising as the population expands and ages. Deaths in Australia will grow 1.4 per cent per annum over 2016-2025, according to Australian Bureau of Statistics forecasts. Forget about talk of people living longer; for now, a larger, ageing population means more deaths each year.
Third, the death-care industry is fragmented. There are more than 1,200 operators, many of which lack scale and have ageing owners who will want to sell their business and retire within 10 years. That’s an opportunity for cashed-up large firms to buy growth.
Fourth, death-care stocks have rewarded investors and there is a clear valuation benchmark. Market leader Invocare, capitalised at $1.6 billion, has a five-year annualised total return (assuming dividend reinvestment) of 13.4%, Morningstar data shows.
Invocare soared to a 52-week high of $18.15 last year before retreating to $14.76.
ASX now has a second death-care stock after Propel Funeral Partners listed through a $131-million IPO in November 2017. Propel’s $2.70-issued shares rallied to $3.34.
Chart 1: Propel Funeral PartnersSource: The Bull
Propel is the second-largest private provider of death-care services in Australia and New Zealand with 80 locations in the Trans-Tasman, including 19 crematoria and five cemeteries. The company has grown since its foundation in 2012 through acquisitions and organic growth.
Some analysts believe Propel’s capital raising and ASX listing is bad news for Invocare. They argue the death-care services market is relatively fixed in size and offers low profit margins. The main way to grow is by taking market share off smaller competitors. Invocare, dominant in many markets, could have greater pushback from regulators eager to encourage competition.
Propel’s listing might, in theory, reduce Invocare’s market-share gains and push up the acquisition prices of smaller rivals because there is more competition to buy them. Similar trends have emerged in industry roll-ups in vet care and dentistry, for example.
The current battle between Propel and Invocare to acquire the Norwood Park funeral business, which is well established in Queensland in the Australian Capital Territory, is a portent of things to come.
Invocare’s share-price falls since Propel’s listing will encourage the bears, but Invocare was due for a pullback after strong gains in 2017.
Price falls have brought Invocare close to value territory. The stock is trading near fair value, based on the consensus of eight broking firms that have an average price target of $14.50. Morningstar’s fair value for Invocare is $16.50.
Chart 2: InvocareSource: The Bull
Invocare is on a forecast Price Earnings (PE) multiple of 26 times. Propel was sold on a PE of 25.5 times at the issue price, now just over 30 times at the current price. That’s high for a small cap with limited trading history.
Investors believe Propel can grow faster than the market expects and beat its prospectus forecast. It has the balance sheet and executive team to ramp up acquisitions and looks like a quality company.
On valuation grounds, Invocare is a better bet. It is the market leader with about 35 per cent share and has much more history as a listed entity than Propel.
Granted, Invocare also has more to lose than a listed competitor and has not faced a strong, listed national competitor previously. But it is a well-run company and has a big headstart.
The market is factoring in a lot of growth in Propel at the current price and almost valuing it like a higher-growth tech stock. Some valuation premium is warranted given the nature of the industry and Propel’s marketing position within it. But the share price may have run too far, too fast for now.
That is not to downplay Propel’s long-term prospects. Invocare, too, looked expensive at its 52-week high. But every stock has its price and it might just pay to stick with the incumbent for now rather than chase growth through an emerging rival.
Invocare’s fall through technical support around $15 suggests further short-term weakness. Chartist will look for Invocare to hold support around $14. Patient investors might find better value emerges in Invocare in the next few weeks as its downtrend plays out.
• 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 you should consider the appropriateness and accuracy of the information, 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 January 31, 2018.