InvoCare: Interim result 2012
Recommendation
Australia and New Zealand’s dominant funeral services provider InvoCare announced substantially higher results for the half year ended 30 June 2012, with sales up 25% to $174.8m and operating earnings per share up 15% to 17.3 cents.
But these results were flattered by the acquisition of a large competitor, Bledisloe, in 2011. Underlying sales rose only 4%, with the number of deaths actually down slight compared with the prior period—a short-term blip contrasting the long term certainty of rising annual deaths in Australia (see Chart 1 of Life’s only certainty suits InvoCare for more detail). This resulted in underlying operating EPS growth of roughly 8%.
Half year to 30 June | 2012 | 2011 | Change (%) |
---|---|---|---|
Sales ($m) | 174.8 | 140.4 | 25 |
Operating earnings after tax ($m) | 19.0 | 15.4 | 23 |
Operating EPS (cents) | 17.3 | 15.0 | 15 |
DPS (cents) | 15.0 | 13.5 | 11 |
Franking (%) | 100 | 100 | - |
As highlighted in our initial review, one of the company's big opportunities is to lift earnings before interest and tax (EBIT) margins from the recently-acquired Bledisloe. That process is already in train, with EBIT margins from the Bledisloe business lifting from 16.7% in the prior period (under the previous owners) to 19.1% this half. Eventually 25% is achievable, in line with margins on the rest of Invocare’s Australian operations.
An even bigger opportunity for Invocare is to maintain, or preferably grow, both its overall market share and margins over the long term. If it does that, underlying market growth will take care of the rest.
Directors declared a fully franked interim dividend of 15 cents (ex date 10 Sep), up 11%. The stock price is up 14% since Life’s only certainty suits InvoCare of 15 Mar 12 (Hold – $7.90) and our thoughts are broadly unchanged. Invocare is an excellent business with enviable locked in future growth. We'd love to own it. But discerning value investors, demanding of a margin of safety and a high likelihood of attractive future returns, always need to consider price. We want the odds stacked a little more heavily in our favour before upgrading. In the meantime, we've slightly increased the prices in the attached recommendation guide, reflecting another year of growth. HOLD.