US Edition Dignity
£15.00+13p
Questor says HOLD
THERE are few things more certain in life, than death, and that’s what makes shares in London-listed funeral provider, Dignity, an interesting opportunity.
The company yesterday reported full-year results ahead of market expectations and is confident of delivering more growth and cash returns to shareholders in the years ahead.
Britain has experienced a stable death rate of between 540,000 and 600,000 each year for more than half a century. The Government Actuary Department projects the rate to rise from 2015 onwards, having reached a low of 539,000 in 2011.
Dignity operates 690 funeral parlours and 39 crematoria across the UK. The company completed 68,000 funerals – up from 63,200 the previous year – and performed 55,500 cremations, an increase of 10pc on the previous year.
It generates around two-thirds of its profits from funerals and a third from cremations. However, the company still only provides funeral services for less than a quarter of the deaths in the UK each year.
The company has plenty of room for growth. The majority of funeral parlours in the UK are still independently owned businesses. The company added 54 new funeral locations last year, once branch closures had been subtracted, and has delivered steady growth for the past decade. Since the company floated in 2004, revenue growth has been 7.3pc a year, and earnings per share have increased by 16pc a year.
Last year, the funeral operator delivered another solid set of results. Revenue increased by 12pc to £257m, pre-tax profit increased by 9pc to £50m, and earnings per share increased 12pc to 72.8p. Investors were rewarded with a 10pc increase in the final dividend to 11.8p, ex-dividend on May 21 and payable on June 27.
As well as growth, the funeral operator likes to return cash. Investors who backed the company at the £2.30 IPO price in 2004 would have received £3.18 per share during the past 10 years, or about 140pc of the original investment, paid out as £2.30 in returns of cash and 68p in dividends.
That means from initial investment of £2.30, investors would now hold £3.18 in cash and the initial shares that are now worth about £15.00.
Dignity is able to do this because of its steady revenue and profits that generate plenty of cash. The company reported cash generated from operations of £94.2m last year, up from £83.3m a year earlier. This strong cashflow enables the company to raise money on the debt markets to fund expansion and return cash to shareholders.
Last year was a perfect example of this. The company raised nearly £100m in new debt and returned £62m of that to shareholders. Dignity also spent £58.3m on the takeover of Yew Holdings, which had 40 funeral locations and two crematoria.
Questor is always wary of debt-funded expansion but in this instance it looks sustainable. Dignity currently has net debt – debt less cash on the balance sheet – of £370m and the company is using its strong cashflow to steadily reduce those debts. Analysts from Investec estimate that net debt should have fallen to £269m by the end of 2016; because Dignity likes to keep the debt level stable this would clear the way for another return of cash to investors of up to £100m.
Dignity shares are currently trading at 19 times forecast earnings, falling to 16 times next year, and that looks high, given single-digit revenue growth and low double-digit earnings growth. Also, with the shares at £15 it would take almost half a century to get your money back if the previous decade’s cash return rate of £3.18 was repeated.
Questor thinks this company is well worth watching and buying if we get a market correction in the future, but at this price it is looking a bit too rich. Hold.