Ann: 2017 Full-year results Media Release, page-7

@CaptainBarnacles

How to value the prepaid funeral business is an interesting topic.

At the risk of sounding dismissive, I will say that I see it as being mostly a nuisance, for the following reasons:

1) It adds significant EPS volatility, on a mark-to-market basis.
2) It exposes the Company’s earnings to fluctuations in the broader financial (and property) markets, which are inherently cyclical and exogenous to the underlying funeral business (vastly perceived as being non-cyclical).
3) It can generate real losses (not just paper ones) at the time when funds under management need to be liquidated (irrespective of the prevailing market conditions) to cover funeral expenses.
4) It forces the Company (or whomever manages the funds, for a fee) to outperform the growth in the cost of providing funeral services over a multi-year period; even if that cost rises merely in line with CPI, it can still prove a demanding task in an inflationary environment.
5) It is unclear whether it actually adds any value on a long-term basis. I suspect that the strong performance of the prepaid business over the past two years was mostly due to very generous valuations across all asset classes (stocks, bonds, property, etc.). If you look at the aggregate P/L between 2010 and 2015 (included) it was actually slightly negative, over a whole six-year period.
6) It merely front-loads future business, which can be helpful in terms of conquering/preserving market share, but doesn’t actually make it any easier to sustain organic growth going forward.

When it comes to valuing the business as a whole, I therefore tend to err on the conservative side and look at operating earnings only, being mindful that the P/L volatility originating from the prepaid business has the potential to erode into those underlying earnings, in the event that mark-to-market losses on managed funds must be locked in.