InvoCare: Bouncing back

About the author:

Author name:

By Alex Lu

Job title:

Analyst

Date posted:

30 August 2022, 7:30 AM

Sectors Covered:

Industrials

• InvoCare’s (ASX:IVC) 1H22 result (Dec year-end) was slightly below our expectation at the operating EBITDA line but slightly above Visible Alpha consensus. Operating NPAT was stronger than expected.
• Key positive(s): Revenue grew in all regions with both funeral case volumes and case average higher; ROCE (rolling 12m) increased 120bp to 11.9%.
• Key negative(s): Mark-to-market revaluation loss of $46.0m on pre-paid FUM assets due to weaker equity markets; Pet Cremations EBITDA dropped 29%; Operating cash flow was down 23% due mainly to higher working capital.
• Management said momentum has been maintained with a positive start to 2H22.
• FY22F/FY23F/FY24F operating EBITDA changes by -1%/-1%/-1%.
• Our target price decreases to (login to view) and with a 12-month forecast TSR of 19%, we upgrade our rating to Add (from Hold).

1H22 operating EBITDA was slightly below our forecast

1H22 operating EBITDA grew 8% to $68.5m (-2% vs MorgansF and +1% vs Visible Alpha consensus) while operating NPAT rose 35% to $27.9m (+7% vs MorgansF and +15% vs Visible Alpha consensus).

The result was underpinned by higher funeral case volumes and case average in all regions (Australia, NZ, Singapore) as well as double-digit growth in burials and cremations in the CemCrem Australia business.

Funeral businesses recover

Funerals Australia EBITDA jumped 17% on the back of an 8% increase in funeral case volumes and 4% rise in case average. Growth came from all markets (particularly NSW) with volumes potentially higher if not for labour constraints.

EBITDA margin rose 130bp to 26.3%, which was a solid outcome in our view given increased labour (overtime) and third-party mortuary ambulance costs, and inflation in some product lines (eg, coffins). IVC was able to mitigate these cost pressures through price rises and good cost control.

Like the Funerals Australia business, NZ (EBITDA +45%) and Singapore (+11%) benefitted from a recovery in case volumes with the easing of restrictions on gatherings (early April in NZ and May in Singapore) allowing a return to higher service funerals.

CemCrem Australia EBITDA rose 2% on the back of double-digit growth in the number of burials and cremations conducted. Memorialisation revenue however stalled in the half with wet weather reducing foot traffic to memorial parks, although performance improved following drier conditions in June.

While only a small portion of group earnings, Pet Cremations was the key disappointment with EBITDA falling 29%. Earnings were impacted by the national integration of the three main Pet Cremations businesses resulting in higher operating costs (mainly staff and travel) ahead of expected sales growth.

Outlook remains positive

Management said momentum has been maintained with a positive start to 2H22.

IVC is seeing ‘excess’ mortality rates in Australia, NZ and Singapore with the easing of restrictions expected to support larger, higher value funerals. 

Management advised that early 2H22 funeral case average is up 7% on the pcp and volume growth is in the high-single digits.

Changes to earnings forecasts and investment view

FY22F/FY23F/FY24F operating EBITDA changes by -1%/-1%/-1%.

Our equally-blended (PE, EV/EBITDA, DCF) target price decreases to (login to view) and with a 12-month forecast TSR of 19%, we upgrade our rating to Add (from Hold).

In our view, IVC is a defensive business with a healthy balance sheet and solid long-term fundamentals (ageing and growing population). Earnings over the past few years have been impacted by COVID-related lockdowns and restrictions on gatherings.

With these restrictions likely a thing of the past, we think the near-term outlook is becoming more positive. Key risks include labour shortages, cost inflation and further wet weather.

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