Morningstar | Improving Market Conditions Help Invocare Performance in 1Q of Fiscal 2019
Wide-moat-rated Invocare has commenced its earnings recovery with a strong start to fiscal 2019. We have not changed our AUD 16.00 per share fair value estimate, to which the firm currently trades at a slight discount. Gross revenue is up 8% on the previous corresponding period, or pcp, which is tracking marginally ahead of our full-year 6% forecast. The stronger-than-expected growth mainly reflects an improvement in market conditions, with the number of deaths reverting towards the long-term trend after having declined by 3% in fiscal 2018. Additionally, we attribute the growth to strong results off the back of the Protect and Grow initiatives, including refurbishment of the funeral homes, along with incremental contributions from the recent acquisitions. As at the end of the first quarter, around 40% of the planned portfolio has been renovated.Over the long run, we continue to project 7% annual top line growth, which incorporates 1%-2% growth in the number of deaths and low-single-digit pricing increases. The remaining revenue growth contribution will come from an expansion in the firm’s market share to 40% within the next decade up from around one third currently. This is expected to be supported by organic gains as the firm’s newly renovated stores come back online in the next 12-18 months, along with small bolt-on acquisitions, most of which we expect will occur in regional areas where Invocare is significantly underexposed.
As expected, net profit grew by a faster pace, rising by 9% on the pcp on the back of a 2.5 percentage point operating margin expansion. We continue to forecast operating margins to expand to around 22% by fiscal 2022, up from 19% in fiscal 2018, on the back of cost-cutting initiatives, growing scale, and operating leverage. These factors should drive underlying EPS growth of around 10% per year over the same period.
Invocare is a provider of services in the funeral industry in Australia, New Zealand and Singapore with smaller operations in Hong Kong and the U.S. Through its associate, Co. provides online memorial services to allow families and communities to celebrate the life of a loved one.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
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