Ann: Dividend/Distribution - IVC, page-7

@madamswer

Yes, this is a company that has always been very efficient at managing costs; hence their sharply improved EBIT margin (even though I do not see it as being an all-time high; for instance I see a margin of 19.5% in CY2013, do you see any different?) even in a “soft” revenue growth environment.

What I personally find most concerning is the loss of market share, as well as the explanation provided by Management to justify it (see slides 25-26 of the Investor Presentation). Citing the “evolution of customer preferences” as a reason for losing market share sounds kind of ominous to me, in particular.

The fact that the loss of volume has been concentrated at the lower end of the market could be seen as a mild positive in an upward trending market. But, the problem is, the current rate of average case price growth is well above inflation (+5.7% vs +1.9% YoY) and the absolute level of average price per case is also above “mid-cycle” levels. Plus, the current death growth rate of 2.8% is above the long-term forecast trend of about 2.0%.

Putting all of the above factors together (i.e. average case price growth reverting to CPI inflation, possibly lower, and death growth rate reverting to its long-term trend), it is difficult to paint a rosy picture for future revenue growth, unless there is a sharp reversal in market share.

Factoring in the structural earnings volatility from the pre-paid business as well (which can generate real losses to the underlying funeral business, not just “paper” ones, as the Company is a “forced seller” of the funds under management, when the proceeds are needed), one has to wonder whether the current EV/EBITDA of 16.3x (on an operating EBITDA basis) does still provide any margin of safety.

On the positive side, the New Zealand market is finally showing some signs of life (no pun intended), with a 20% EBITDA increase after a long period of underperformance.

I always have IVC on my radar screen, as I view it as a rather unique asset on the ASX which is worth monitoring; but, at its current valuation and until the market share issue is resolved, I have decided to step out and watch. Generally speaking, I feel there is a “consumer discretionary” component to this business that may be underappreciated.

Any thoughts?