The hot stock making money from the dead
Key statistics: ASX: IVC
Closing share price 28-6-16: $12.79 52-week high: $13.72 52-week Low: $10.47 Most recent dividend: 22.25c Annual dividend yield: 2.99% Franking: 100%
While this might seem like an under-the-radar stock (who likes talking about the business of death?), Invocare has quietly become the No. 1 operator of funeral homes, crematoriums and cemeteries in Australia, New Zealand and Singapore.
The company commands 34% of the Australian/New Zealand market with a market capitalisation of $1.3 billion.
In Australia the company operates three national brands - White Lady, Simplicity and Value - and a large number of state-based brands.
Prepaid funerals allow customers to purchase a future funeral service at today's price.
For Invocare, the development of this market serves as a form of debt funding.
At the end of 2015 financial year prepaid funds on the balance sheet were $422 million and are primarily invested in fixed interest and property, with less than 20% allocated to equities.
Invocare is a very high-quality business with a demonstrated track record of stable, long-term revenue growth.
Perhaps it goes without stating that the company is favourably exposed to Australia's ageing population.
Earnings are relatively predictable and both the capital structure and the cash flows are also stable.
The national death rate may vary from year to year but in the absence of a material change to life expectancies the average death rate over longer periods is effectively locked in and forecast by the Australian Bureau of Statistics to increase.
In light of the secure nature of Invocare's earnings and growth prospects, we'd argue when valuing the company's shares that a discount rate at the low end of our normal range is warranted.
However, we find the estimated value appears to fall short of the current market price. We estimate value to be in the order of $8-$9 a share, compared with a current market price closer to $12.
The share price today is partly a reflection of business quality and underlying growth but it is also driven by an increasingly favourable treatment of earnings.
The company's shares have become more popular.
That suggests that we should be more optimistic that the opportunity to buy at a rational price can be presented.
It might be worth remembering our valuations if any correction in the market for highly reliable and stable revenue-earning companies occurs.