Shares in funeral operator InvoCare Limited (ASX: IVC) opened strongly higher today following the release of its full year 2015 results.
At one point, shares gained more than 4.2% and hit a high of $11.35, before giving up some of those gains as the broader market turned into negative territory. At the time of writing, however, InvoCare shares were still holding on to a 2% gain and trading at $11.15.
The shares have been struggling to gain any momentum over the past 12 months, but the market's initial reaction suggests the results were better than expected. Some of the key financial highlights from the results included:
- Total group sales increased by 5.7% to $436.4 million
- Funeral case volumes increased by 2.7% over the prior corresponding period (pcp)
- Operating expenses increased by 6.7% over the pcp
- EBITDA increased by 4.3% to $105.4 million
- Net profit after tax (NPAT) increased by 0.6% to $54.8 million
- Basic earnings per share (EPS) increased by 0.6% to 50.1 cents
- Final fully franked dividend declared of 22.25 cents per share, bringing the total full year dividend to 38 cents per share, an increase of 4.1% over the pcp
- Net debt to equity of 109%, down from 117% in the pcp
The company generated reasonable growth in sales, but overall group profitability was impacted by investment costs associated with InvoCare's expansion into the US market. Costs have been higher than first expected and this has been one of the overhanging factors behind InvoCare's lagging share price over the past 12 months. Despite spending $5.7 million on acquisitions and start up costs in FY15, the US operations are yet to turn a profit, and in fact, generated an EBITDA loss of $3.8 million.
Although this will be concerning for some investors, management has stated it is committed to the current strategy and believe no fundamental change is required following a review of the current operations.
Looking past the US operations, InvoCare enjoyed solid trading conditions in Australia, New Zealand and Singapore. The company maintained its market share in all three countries with sizeable market shares of 34% in Australia and New Zealand.
Despite higher operating expenses, margins were maintained throughout the year through the implementation of modest price increases.
InvoCare's prepaid funerals service also continues to perform strongly with a 4.7% increase in the number of contracts sold over the period. The company now holds more than $422 million in funds under management that it is able to earn a return on. Investment returns from these funds decreased in FY15, with net gains on these funds of $7.5 million, down from $10.9 million in FY14.
Outlook
The nature of InvoCare's business means growth in revenues is driven primarily through the increase in the death rate and/or increases in market share. The death rate is expected to grow by around 1% in the short term, with a higher rate expected in the medium to long term as time finally catches up with our ever-increasing ageing population.
Conditions are expected to remain stable in Australia, New Zealand and Singapore, but remain challenging in the newly established US market. As a result, total group sales and earnings growth is expected to remain fairly flat over the next 12 months with stronger growth predicted over the medium term.
Foolish takeaway
Although InvoCare operates in a defensive and predictable sector, I believe it lacks the earnings growth and balance sheet strength to justify its current valuation. The shares are trading at nearly 22x earnings and considering earnings are likely to remain flat over the next 12-24 months, there are far more attractive investment opportunities elsewhere in my opinion.
