InvoCare: Result 2012

A pick-up in the number of deaths in the second half of 2012 has helped InvoCare to a 17% increase in underlying net profit to $43m, on sales that rose 15% to $369m. Underlying earnings per share rose a slightly slower 13% to 38.8 cents, due to the issue of shares to fund the acquisition of Bledisloe in late 2011.

Excluding Bledisloe, the underlying profit would have risen 12% on a 5.8% increase in sales.

Annualised cost savings of $3.5m have now been achieved at Bledisloe and its earnings before interest, tax, depreciation and amortisation margin of 18.8% compares with 26.7% for the rest of the group, so further improvement is likely.

Strong brands

As well as the increased number of deaths, InvoCare was able to increase its market share slightly (putting the overall number of funerals performed up by 1.5%) at the same time as pushing through price increases that saw the average revenue per funeral rise by 4.3%.

It’s a good business that can raise prices at the same time as increasing market share in a growing market, and it reflects the price inelasticity of the funeral market, as well as the strength of InvoCare’s brands.

On a statutory basis, net profit was up 65% due to weak investment performance in 2011. The company collects payments in advance for funerals and invests the money – very conservatively – and takes the difference between the investment return and the expected cost of providing the funerals through the profit and loss account each year. In 2012, the company almost broke even with the expected costs rising $17.7m while the investments returned $17.6m. In 2011, on the other hand, a increase of $15.5m in expected costs was much higher than an investment gain of only $2.1m, leading to a loss of $13.4m.

Valuation stretched

Operating cash flow rose 21% to $53.2m and $34.8m of that was left after capital expenditure, just covering the dividend payments of $34.4m. Net acquisition costs of $6m meant that net debt rose slightly to $217m, compared to equity of $152m. However, the high returns on that equity meant that the interest bill was covered five times by earnings before interest and tax and more than twice by free cash flow.

We’d expect to see earnings per share growth in the high single digits over the long term, although the high payout ratio may need to drop a little at some point given the high debt levels, meaning that dividend growth might be a little lower. To this you can add a current dividend yield of about 3.4%, which isn’t quite enough to interest us, even for such an attractive business.

On an earnings basis the valuation looks more stretched, with the stock trading on a multiple of 26 times 2012 earnings and about 23 times the consensus forecast for 2013.

The stock is up 11% since 4 Sep 12 (Hold – $8.99). HOLD.