EUR 850.00 For Business Accounts Only

Morningstar | Corporate Action: Invocare Shareholders Apply in Full for the Share Purchase Plan. See Updated Analyst Note from 15 Mar 2019

We recommend wide-moat-rated Invocare’s shareholders apply for the full allocation of shares offered in the share purchase plan, or SPP. The SPP issue price will be the lower of AUD 14.00 per share (the price at which new shares were issued under the institutional placement), and the volume weighted average price, or VWAP, of InvoCare shares traded on the ASX over the five trading days up to and including the day on which the SPP offer is closed. The offer opens for eligible shareholder on Monday, 18 March 2019, and is scheduled to close on April 5. The offer price represents a minimum 13% discount to our unchanged AUD 16 per share fair value estimate. Eligible shareholders are limited to a maximum investment under the SPP of AUD 15,000, providing existing investors the opportunity to participate in the future earnings growth.

The company successfully raised AUD 65 million via an institutional placement, at an issue price of AUD 14 per share, representing a discount of 2.4% to the closing price on March 7. The SPP Offer aims to raise up to a maximum of AUD 20 million, taking the total raise to AUD 85 million.

The proceeds will help fortify the firm’s balance sheet. While we are comfortable with the firm's current financial health, the equity raising is a prudent decision in our view, especially given shares in InvoCare have rallied by almost 50% since the start of 2018. This capital raising should alleviate any lingering balance sheet concerns and, based on our projections, fiscal 2019 net debt/EBITDA should fall to around 2.7 times, down from our previous estimate of 3.3 times. As earnings continue to recover, capital expenditures moderate, and the company divests noncore assets, net debt should fall toward 2 times EBITDA by fiscal 2022, a much more desirable level.

Additionally, the capital raising will add to the company’s financial firepower, particularly important as the firm progresses with its growth initiatives. The Protect and Grow project is management's primary focus, and we are encouraged by the strong growth demonstrated by sites which have already gone the refurbishment process. At the current pace, 43% of the locations are on track for completion by the end of 2019, while the majority should be wrapped up by the end of 2020. The capital raising is also supportive of the regional acquisition strategy, which saw AUD 73 million deployed during 2018 to acquire 11 businesses that are performing ahead of management expectations. The firm's share of the regional markets remains negligible, and this is a huge growth opportunity for the company which should benefit from the additional scale.

We continue to forecast the top line to grow at around 7% per year on average during the next five years, supported by a resumption of 1%-2% growth in the number of deaths; a return to around 3% per year pricing increases, which should be achievable as new shops open and industry volumes grow which should stabilise competitor behaviour; and incremental market share gains. As revenue resumes growing, operating leverage and efficiency gains should help EBITDA margins improve from the current 25% (fiscal 2018) back above 26% within the next three years.