InvoCare Limited (ASX: IVC) has reported its result for FY17, which ends 31 December 2017.
InvoCare is the largest funeral operator in Australia and New Zealand, with many different brands.
Here are some of the highlights, compared to the prior corresponding period:
- Sales revenue up 1.8% to $470.9 million
- Operating earnings before interest, tax, depreciation and amortisation up 7.8% to $124.3 million
- Operating earnings per share (EPS) up 10.5% up 57.9 cents
- Dividend per share up 8.2% to 46 cents
- Basic earnings per share up 37.2% to 88.8 cents
I am impressed by InvoCare's ability to churn out operating profit per share growth of above 10% again and again.
During the year the number of deaths increased by 1.7%, which was a good driver for InvoCare's revenue growth as its market share of the funeral industry actually declined by 0.9%.
InvoCare's average price per funeral increased by 3.1%, which managed to slightly beat inflation.
Increasing the EBITDA margin was a key victory for InvoCare, it increased from 24.9% in FY16 to 26.4% in FY17. This was created by a lower cost of goods expense due to the centralised procurement approach around key product lines and sales mix. The other cost reduction factor was reducing discretionary costs such as professional fees.
The business is investing money into its 'Protect & Grow 2020 Plan'. During the year it refreshed 22 sites, enhanced two sites and opened four sites. It has also commenced refreshing 25 sites, enhancing 11 sites and opening 15 sites. The company is also working on operational efficiencies by implementing better software and shared service facilities.
The difference between the operating earnings and actual reported earnings are items like the gain (or loss) on prepaid contracts, which came in at $58.9 million this year.
InvoCare improved a key debt metric, with interest cover improving from 10.1 times to 12 times.
The funeral operator took a large investment move by selling out of a commercial property. This reduced its funds under management (FUM) allocation of property from 32% to 16%, while increasing cash & fixed interest to 64% and equities to 20%.
Management commented on the current operating climate by saying that the Australian market has always demanded different products with different prices, which is why it set up its multi-brand approach of White Lady Funerals, Guardian, Simplicity Funerals and Value Cremations. However, customers are now preferring 'contemporary' funerals, which is why management has launched the Protect & Grow plan.
Outlook
Management say InvoCare is well positioned to meet the changing market and can deliver sustainable double digit operating EPS growth in the medium to long-term, supported by the forecasted death rates growing by around 2.8% by 2034.
However, 2018 is expected to show low single digit 2018 operating EBITDA growth and flat operating EPS due to the closing of sites for refurbishment and increased depreciation and cost of debt. The benefits of the investment won't be felt until 2019.
Foolish takeaway
I thought the 2017 result was quite impressive and showed the strength of InvoCare's long-term business. I am a fan of companies that invest for the future, which InvoCare is doing with its Protect & Grow plan, but this may be a necessity to maintain growth as opposed to new growth.
However, if the market does not like the short-term outlook, essentially the next year or two, then I believe a fall in the share price will represent a good ultra-long-term opportunity.
