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Why the Propel Funeral Partners Ltd share price is already up 27%

The Propel Funeral Partners Ltd (ASX: PFP) share price has grown by 27% since its initial public offering (IPO) price of $2.70 and 4.2% since its first day closing price of $3.30 a month ago.

Propel is already the second biggest funeral operator in Australia and New Zealand, only behind InvoCare Limited (ASX: IVC). Propel estimates that it has a market share of around 4.1% in Australia and 6.7% in New Zealand.

The demand for death care services is expected to grow by 1.4% per annum between 2016 and 2025, whilst demand in New Zealand is expected to grow by 1.1% per annum between 2016 and 2025. This will be a big tailwind for Propel’s organic growth.

Propel currently operates in different markets to InvoCare. Propel has a strong presence in the regional areas of New South Wales, Victoria, Queensland, Tasmania, South Australia and New Zealand. Whereas InvoCare mainly operates in the major cities.

The big driver for Propel’s growth over the next few years will be acquisitions. It has ample opportunity to increase its market share up to double digits.

In its prospectus Propel said that there are a number of benefits from realising operational efficiencies as it grows the business. Some of the benefits include establishing greenfield locations, extracting procurement synergies and greater purchasing power through economies of scale.

Propel has only been on the market for a few weeks and has already announced an exciting acquisition.

The business will be purchasing Brindley Group Pty Ltd and associated entities for $15.38 million. The Brindley Group conducts around 1,350 funerals each year and is expected to increase Propel’s annual funeral volumes by approximately 13%.

Brindley Group generated approximately $11 million of revenue in FY17 and the purchase should be accretive to Propel’s earnings in the first year. This acquisition will be funded by cash reserves, which should leave the balance sheet in good order.

Foolish takeaway

I think Propel could be one of the top-performing small caps over the next few years. However, it isn’t trading cheaply. It was trading at 26x FY18’s forecast earnings at the offer price of $2.70. It’s now likely trading at beyond 30x FY18’s earnings, but today’s price could still be worth a buy for a long-term investor.

If Propel isn't for you, then these top growth shares are trading at much better value and should easily beat the market.

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Motley Fool contributor Tristan Harrison owns shares of InvoCare Limited and Propel Funeral Partners Ltd. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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