AFR

Invocare, Propel safe for now from UK funerals shock​

Death and taxes are two of the certainties in life. But investors in Australia's two listed funeral stocks, Invocare and Propel Funeral Partners, have cause to ponder the potential of some unwelcome uncertainty.
The premise of expanding populations providing a steady stream of future profits – as the inevitable eventually occurs and families need to use funeral companies to farewell the dearly departed – has been a core belief for the sector. Disruption has come to many industries, but most pundits expected funerals and cremations to be safe.
But a 50 per cent tumble in the share price on January 18 of the United Kingdom's second-largest funeral business, Dignity, has thrown some doubt into the investment equation as the full impact of a price war emerged in Britain, and the old rules were overturned.
It was economics at work rather than a digital skewering. Put simply, people in Britain have been baulking for some time at paying high prices for funeral services.
A substantial not-for-profit operator, the Co-operative Group, began significantly cutting prices in 2016 by more than 25 per cent for basic services. Dignity was forced to respond to preserve market share and while it took some time to play out, it confessed to the market a week ago that profit margins just can't be sustained into the future.
The game was up and its share price was trashed. It all happened against the backdrop of general pressure on household spending and a growing awareness that funeral costs had been rising for decades and people weren't going to cop it any more.
Morgan Stanley analyst James Bales and his colleagues in Sydney had a close look at the Dignity fall from grace and scrutinised the potential of a similar shift happening in Australia's $1.1 billion death care industry. It is market competition that is the central issue, they concluded.
Cracks in the model

"For decades, the global formula for leaders in the funeral industry was along the lines of rising death rate plus price rises plus industry consolidation plus operating leverage equals double-digit earnings per share," Mr Bales said.
"Investors are clearly rethinking this as a result of Dignity's downgrade."
The Morgan Stanley analysts said the Dignity downfall raised some interesting questions over the longer term for the Australian market, but the missing element for a big downward slide in funeral prices in Australia was the lack of a sizeable not-for-profit funeral provider in the local market. Most of the other players in the Australian market are small, family-owned operators who are simply too small to have a pricing impact.
Invocare shares have dropped in the past few days in the wake of the Dignity tumble in the northern hemisphere, falling from $15.74 on January 19 to around $14.70 on Wednesday.
Mr Bales said while consumers would benefit and would be "getting a greater share of the spoils" from Invocare's $200 million refurbishment and investment program on its network of 250 funeral homes, which is under way, there did not seem to be a competitor "with the capital or motivation to push aggressively on price in Australia and New Zealand".

It still puts a value of $18 on Invocare shares.
Consumers are becoming more aware of pricing structures and what is available, helped along by online price comparison website Gathered Here, which makes it easier for potential users to shop around at a time when they are consumed by grief.
Propel a winner so far

Propel Funeral Partners became the ASX's second funeral stock in late November 2017 as it sought to emulate Invocare by buying up smaller operators and building on its current market share of 5 per cent.
Propel, which runs 80 funeral homes, mainly in regional Australia, delivered big stag profits to investors in its initial public offering when it began trading on the ASX, closing at $3.30 on its first day of trading, compared with an issue price of $2.70. It reached $3.59 on January 19 but has lost about 3 per cent of its value since then.
Propel is run by managing director Albin Kurti, who was a driving force in the $114 million sale of a trans-Tasman funeral group called Bledisloe Holdings to InvoCare in 2011. He has built Propel into the second biggest operator with 80 outlets from a standing start in 2012.
Propel is a long way behind Invocare, which has almost 32 per cent of the market. Invocare required clearance from the Australian Competition and Consumer Commission in 2011 for the Bledisloe acquisition. Invocare operates 250 funeral homes and crematoriums, including brands such as White Lady Funerals, Simplicity Funerals and Tobin Brothers.
Propel has a large presence in Tasmania where it operates from 19 locations under brands such as Pinegrove Funerals, Millingtons and Phillip Stephens Funerals. It runs 16 funeral homes in New Zealand, 12 in NSW, 11 in Queensland and eight in Western Australia.

David Bowie influence

Invocare is run by chief executive Martin Earp and also has more than $500 million in funds under management from people who have entered into pre-paid funeral contracts, which also deliver a reliable earnings stream. The company's $200 million investment and modernisation program known internally as "Protect and Grow" is sprucing up its network and making its outlets more contemporary.
Mr Earp signalled several months ago that trends were changing in the industry and people wanted a more modern approach where they had a greater say in how the funeral service was conducted and wanted more of a focus on the "celebration" of a person's life rather than be completely enveloped in sadness and gloom at a difficult time.
Invocare in 2017 had a taste of what tougher economic conditions may do, with competition very fierce in Western Australia in the wake of a severe mining sector downturn, where customers baulked at paying for expensive services.
In Britain, funeral operators have also been grappling with the advent of a new way of farewelling loved ones in a so-called "direct cremation".
It has been growing in popularity after music legend David Bowie had a direct cremation in early 2016. Under that model, the body is collected from the place of death, be it a hospital or home, and transported straight to the crematorium. The ashes are returned to the family for scattering or a private ceremony at their choosing without the usual trappings.
Novelist Anita Brookner was also part of that movement in the UK after she requested that no funeral be held after her death.