InvoCare: Interim result 2018

On a like-for-like basis, InvoCare's first-half result was awful. Removing the effect of accounting changes and one-off items, and adjusting for a normal tax rate, we estimate underlying net profit fell 23% to $18.8m.

The numbers in the table, including the restated 2017 figures, represent InvoCare's ‘new normal', based as they are on beneficial changes to accounting standards. But they give a much-too favourable picture of how the business actually performed. InvoCare released its second profit downgrade today – the first was in May – so it's getting worse too.

Management put this year's lower-than-trend death rate down to the mild flu season. But the company's performance has been made worse by the issues highlighted in English lessons for InvoCare and InvoCare: Result 2017. The company is losing market share to cheaper operators, while the Protect & Grow refurbishment program has caused disruptions.

Delays meant that only about 20% of the shopfront network had been refurbished by 30 June. A massive 52 sites are planned to be built or refurbished in the current half – the company's busiest period. Assuming targets are met, just 40% of the network will be refurbished by year-end; the disruption will continue until 2020.

Management is talking up the refurbishment benefits. Of the 47 shopfronts refurbished so far, earnings are 30% above expectations. This bodes well and shows the necessity of undertaking Protect & Grow. Management deserves plaudits for this ‘pain today, gain tomorrow' behaviour, although arguably it had little choice.

The second half will be much better than the first. It's seasonally stronger, the refurbished Singapore location has recently reopened, and InvoCare has been making acquisitions in regional areas to counter Propel. Management is now counting on flat underlying earnings before interest, tax, depreciation and amortisation (EBITDA) in the second half, although that might still prove optimistic. If management's new numbers are correct, we estimate underlying earnings per share will fall 13% to about 47 cents this year.

Despite this bad news, the market seems to be looking through to recovery. But on an underlying 2018 forecast price-earnings ratio of 28, and with a deteriorating balance sheet, InvoCare looks very expensive. SELL.

Disclosure: The author owns shares in InvoCare, although they amount to less than 1% of his portfolio after he sold half his holding several days after our downgrade to Sell in February.