Overview: InvoCare Limited (“InvoCare”, “the Company”) owns and operates funeral homes, cemeteries, and crematoria across Australia, New Zealand, Singapore, and the U.S. InvoCare owns key national brands Simplicity Funerals, White Lady Funerals, and Singapore Casket, as well as leading brands in each Australian state in which it operates. The Company’s operations stretch across 270 funeral locations and 16 cemeteries and crematoria.
Catalysts: InvoCare continues to be well managed and earnings sound, experiencing steady top-line growth. Over the past five financial years, the company has achieved a compound annual growth rate (‘CAGR’) of 10% per annum. Tight management of costs and an increasing percentage of pre-paid funerals provide increased certainty on price and future market share. The industry is relatively fragmented and consolidation via acquisitions provides additional upside. InvoCare has a strong track record of distributing income to shareholders.
Hurdles: Over the past few years, operating margins have been volatile and expenses have increased during H1FY16. The Company’s market share has recently declined and there is no guarantee that this trend won’t continue. Borrowings of 2.5x EBITDA and prepaid contract liabilities may impact InvoCare’s ability to expand in a relatively stagnant sector.
Investment View: InvoCare offers profitable exposure to demand for funeral services. We are attracted to its revenue growth trajectory, income profile, and resilient business model. Principal risks include lumpy earnings, cost control, and the potential to improve margins. InvoCare has a strong record of distributing steady dividends to its shareholders and as the company operates in a fragmented industry dominated by private operators, consolidation is a major value driver. We initiate coverage for its track record of revenue growth and defensive income profile and issue a ‘buy’ recommendation.
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