Price Disruption Not Critical For InvoCare
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UK funeral operator Dignity experienced almost a -50% decline in it share price last week, after signalling it would cut prices in response to competitive pressures. Several brokers contemplate the implications for Australasia's major provider of funerals, InvoCare ((IVC)).
Morgan Stanley points out that for decades, the global formula for leading operators in the industry was thus: rising death rate + price rises + industry consolidation + operating leverage = double-digit growth in earnings per share. This appears to be something that may need to be re-calibrated as a result of the Dignity downgrade.
Dignity has confirmed its FY17 result would be in line with expectations but has decided to protect market share by reducing average prices by around -25% and stated this decision will lead to substantially lower profits in 2018.
The recent Dignity experience suggests to Morgan Stanley there is clearly a competitive issue and price disruption in the UK marketplace and the question to ask is whether this could happen in Australasia.
However, the broker notes that, unlike in the UK, there is no national, fully guaranteed, funeral plan provider of scale in Australasia. Also InvoCare appears to have achieved case average increases from migrating customers up the value chain rather than via price increases in recent years.
Moreover, in terms of disruption, there appear to be few significant competitors. InvoCare estimates its market share at 31% while the listed Propel Group ((PFP)) has around a 5% share. Other players are largely family-owned so the broker struggles to find a competitor with the capital motivation to move aggressively on price.
Morgan Stanley values the stock using a blended average valuation with a price target of $18. Rating is Overweight.
At the other end of the spectrum Ord Minnett has a Lighten rating with a $13.75 target. The broker notes InvoCare is embarking on an ambitious expenditure program, intent on spending $200m over the next four years as it refreshes sites and advances IT systems.
While the broker envisages a minor disruption to the underlying business as the program gets underway, the greater uncertainty is whether the expenditure will allow the company to push prices well ahead of inflation in the medium term.
The prevailing backdrop is that price comparison platforms and distribution aggregators in Australia are in their infancy.
FNArena's database has two Buy ratings, one Hold and four Sell. The consensus target is $14.46, signalling -1.5% downside to the last share price. Targets range from $11.50 (Citi) to $18.00 (Morgan Stanley).
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