COMPANY DATA

Source: Bloomberg

Company Description

INVESTMENT SUMMARY

• At 18.0x PE20, 5.9% dividend yield – we upgrade to Buy but acknowledge we may be early and believe that IVC is more of a 2020 story.
• Potential for increased death rates.
• Continued cost control from strategic review and operational efficiency.
• Benefits derived from “Protect and Grow 2020 plan”. Management noted on the analyst call “longer term, we believe that market share will benefit significantly from the Protect & Grow plan, which will meet customers’ needs, and we will set the business up for sustainable double-digit EPS growth”.
• IVC benefits from demographics and long-term population growth.
• IVC holds leading market positions in its core markets.
• IVC has strong cash flow conversion and generation.
• High barrier to entry with quality assets and business model that is difficult to replicate.
• Increased competition from budget operators in Australia.

• Continued reduction in death rate compared to expectations/forecasted trend.
• Increased competition especially around pricing.
• Protect and Grow 2020 does not yield incremental returns as anticipated.
• Underperformance of funds under management.

Figure 1 : IVC revenue by Geography

Source: Company

• Lower deaths rates squeezing Australia margins. Australian funeral sales decreased -3.5% to A$144.5m. Average revenue per funeral contract numbers also decreased slightly by -1.9%, resulting in ~$2.2m reduction in sales. The number of deaths increased at a weak rate of +1.2%, considerably lower than the +5.0% experienced previously (management notes these rates as not unusual, as such trends seem to bounce back “following a period of lower than anticipated growth”. These lackluster results also reflect strong competition from smaller operators in “contracting market conditions and greater volume of value cremations in isolated markets”, resulting in lower case averages (-2% yoy). Nonetheless, management notes 1H19 has seen a stabilization of market share despite NBO disruptions. Outlook wise, management believes that the case average will revert to traditional levels of +3-4% pa as more locations are renovated. Australian cemeteries and crematoria sales delivered an increase of +18.3% to A$57.6m and will likely see strong FY19 results on the completion of large developments.
• New Zealand market share stable. Sales were down -1.8% to A$22.1m, impacted by unfavourable foreign exchange movements as case volumes were largely stable and in line with the pcp as market share remained stable. However, earnings were 10.4% weaker to $4.1m and margins lower at 18.5% (from 20.3% in 1H17).
• Singapore underperforms… The segment was a heavy drag on IVC performance, with case volume down -23.8% and sales down -22.1% to A$6.6m as a result of temporary parlour closures in 4Q17 for major renovations (reopened in mid 2Q18). Case averages also declined -23.8%, albeit in line with expectations as a result of facilities upgrades.
• FY18 gloomy outlook. Management outlook comments remained largely gloomy. For 2H18, management expects operating EBITDA to experience low single digit growth over the previous year”, and “mid-single digit decline in operating EPS” – due to higher financing costs and NBO related depreciation. Management also cautions that if soft market conditions continue, full year guidance will be impacted, and operating EBITDA may experience a “mid-single digit decline on pcp”.

IVC FY18 Results Summary

Source: BTIG, Company, Bloomberg

Figure 3: IVC Financial Summary

Source: BTIG, Company, Bloomberg

COMPANY DESCRIPTION

InvoCare Ltd (IVC) is the largest private funeral, cemetery and cremation operator in the Asia Pacific Region. It has leading market positions in countries like Australia, New Zealand, and Singapore.