InvoCare is a growth business

For the super rich, smart accountants and cross-border loopholes can reduce the inevitability of life's other certainty. Death isn't so easily avoided, which makes it a great foundation for a business.

For the super rich, smart accountants and cross-border loopholes can reduce the inevitability of life's other certainty. Death isn't so easily avoided, which makes it a great foundation for a business.

InvoCare is the country's largest funeral services provider, with dominant market positions in Australia and New Zealand, plus a smaller presence in Singapore.

As the beneficiary of huge population growth, it is also highly profitable.

According to estimates from the Australian Bureau of Statistics, the number of deaths annually will grow more than 1.5 per cent a year between 2010 and 2020 and continue to accelerate, peaking at 2.7 per cent annual growth in about 2030 before falling back to 1 per cent by 2050.

Enthralling as this growth might be (the percentages may be small but the absolute numbers are huge), buying into a funeral company doesn't guarantee investment success.

Without a sustainable competitive advantage or moat, increased competition attracted to growth markets can more than offset the benefits.

InvoCare's moat is deep and broad, which means the near-certain growth rate in annual deaths should generate higher profit growth for the company for decades. Its market share all but guarantees it.

Vertically integrated

National brands White Lady and Simplicity, plus 40 regional brands, together comprise more than 200 funeral homes around Australia, handling about one in three funerals.

Competition, such as it is, can best be described as gentlemanly.

As one competitor put it in a submission to the Australian Competition and Consumer Commission arguing against InvoCare's ultimately approved acquisition of operator Bledisloe, families rarely "cross a major road, bridge, bushland or train line to find a funeral director".

In effect, InvoCare owns several hundred local monopolies. That means the price of funerals can be increased without many sales being lost to competitors.

InvoCare's moat is further deepened by its prepaid business. Many people pay for their funerals well in advance, locking in today's price for the big day.

About 13 per cent of the services InvoCare delivers each year are prepaid, which explains why more than $300 million is sitting in trust - almost one year's worth of sales.

InvoCare is also vertically integrated, meaning it owns 14 cemeteries and crematoria in NSW and Queensland. Again, many of these are local monopolies, especially in the more established areas of Brisbane and Sydney.

Predictable growth

These factors make it likely that, over the next decade or two, InvoCare will at least maintain its current market share, if not expand.

Furthermore, management expects price growth of 3 per cent to 4 per cent a year, a figure it has easily achieved in the past without the benefit of much higher increases in the death rate.

The company should deliver organic revenue growth of at least 6 per cent to 7 per cent before acquisitions over the next few decades. Operational and financial leverage mean underlying earnings per share and dividends should grow a little faster than this figure, which doesn't account for expanding margins, for which there's plenty of scope.

InvoCare's earnings per share will almost certainly be far higher in 10 years, and higher still in 20. The company offers the sort of predictability and growth that few stocks on the ASX can match.

Does that mean you should rush out and buy it? Unfortunately, the market is well aware of the company's growth prospects.

Outlook

On a price-to-earnings ratio of 23 times, today's investor is already totally reliant on InvoCare delivering significant profit growth. The fully franked yield of 3.9 per cent needs to increase rapidly if attractive total investment returns are to be delivered.

Whether InvoCare will generate the sort of profit growth to turn that yield into total returns over the very long term of say 7 per cent to 8 per cent (ho hum) or 10 per cent to 12 per cent (more interesting) is where even perfectly rational investors might differ. But most would agree that this is a fantastic business with incredible growth potential.

Below $7, it would be a very interesting proposition. As it stands, it's worth a place on your watch list.

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