Two things are certain about funeral company InvoCare’s interim result yesterday. A weaker death rate hurt the result, while a lower tax rate helped. But with revenues rising just 3% – see Table 1 – why was the headline profit up a whopping 51% to $28m?
We’ll turn to that in a moment but the underlying first half profit increase was much more subdued – earnings rose 13% to $22m. That might seem decent enough but it was ‘low quality’ – a temporarily lower tax rate and a reduction in interest expense drove much of the increase. Underlying EBITDA rose 5%, which is probably a fairer reflection of the performance of the business.
InvoCare is about as reliable a business as you’ll get (see InvoCare: Result 2015). Long term, you can expect the number of deaths to keep rising, while price rises and market share gains mean revenue growth is pretty much locked in.
|Half-year to 30 June||2016||2015|| /(–)
|* Interim dividend 17 cents, ex date 14 Sep|
|Note: Figures are underlying results|
In the short term, though, the number of deaths can fall below or rise above trend. Macabre it might be but chief executive Martin Earp explained on the conference call: ‘it was a mild autumn, and that doesn’t help the business’. Who knew climate change might hurt InvoCare?
With a 0.3% decline in the number of deaths during the period, and a related minor downturn in market share as small competitors chased volume, the first half of 2016 was weaker than usual. It also explains the 8% slump in the share price over the past few days. But this is a business where mean reversion – see Ansell: Result 2016 – is almost guaranteed.
The 51% increase in headline profit mentioned earlier can safely be ignored, except for what it implies about future earnings volatility. InvoCare provides prepaid funerals and, while we won’t bore you with the accounting, returns from the investment portfolio that will fund future liabilities are taken to the income statement. Headline profit was boosted by property revaluations this half but future returns may be much less favourable.
InvoCare’s second half is much stronger – more people die in winter, you see – so full year EBITDA is likely to be close to $110m. The stock is no bargain but high quality deserves a premium. We’re adjusting our price guide up a little but the stock remains a HOLD.
Disclosure: The author owns shares in InvoCare.