This morning, market-leading funeral provider InvoCare Limited (ASX: IVC) revealed its half-year result for the six months to 30 June 2018 showing a slight increase in revenue but a decrease in profit.
The statutory profit was down 50% due to positive property revaluations that occurred last year that weren't repeated this year. This doesn't affect the 'operating' results.
InvoCare's operating revenue was $225.7 million, which was an increase of 0.4% compared to the prior corresponding period (pcp). The key Australian business delivered a 1.8% increase of operating revenue to $196.7 million, however the New Zealand segment reported a 1.8% decline and the Singapore segment showed a 22.1% reduction.
There are several moving parts to consider with revenue. Perhaps pleasingly for society, the number of deaths in InvoCare's core markets decreased by 0.7% compared to the pcp. The rolling 12-month market share declined 0.9% despite its renovation efforts. The average funeral case declined by 1.7%.
InvoCare achieved the slight operating revenue growth due to the realisation of deferred memorialisation sales in the cemeteries and crematoria business on completion of instalment payments.
There have been accounting standard changes relating to the deferral of income and expenses which are expected to be favourable for the next few years to operating earnings before interest, tax, depreciation and amortisation (EBITDA) and earnings per share (EPS).
Operating EBITDA fell by 0.3% and operating earnings after tax declined by 7.4%. InvoCare is undertaking its 'Protect and Grow' plan to protect its market share and grow profits. This is resulting in short-term pain for long-term gains.
A major part of the plan is implementing what InvoCare calls the Network, Brand and Optimisation stream (NBO), which includes refurbishing a large number of its locations. In the 2018 year to date (YTD) 19 NBO locations have been completed.
Is the short-term pain worth it? InvoCare stated that the completed NBO locations are exceeding modelled EBITDA by more than 30%. For now, it definitely seems to be worth it.
InvoCare's Chief Executive Officer, Martin Earp, said that the company is around 20% of the way through the Protect & Grow implementation and is on track to deliver the plan. By the end of the year 40% of the network will have been completed.
All of the above relates to InvoCare's organic growth activities. It has also been on an acquisition spree over the past few months adding nine acquisitions in Australia and New Zealand so far to stop competitors expanding into those areas.
Deaths in the Australian regional markets are around 50,000 per annum and InvoCare only has a market share of about 5% of this. The acquisitions have added roughly $21 million of annualised revenue which should boost the second half of the year and FY19 onwards.
Within the above numbers was another acquisition announced today, being William Morrison Funerals based in Auckland. It comprises two funeral homes including a cremator. The business carries out around 950 funerals and around 720 cremation cases for approximately NZ$5.2 million of revenue annually.
The Directors of InvoCare took the unfortunate measure of reducing the dividend to 17.5 cents per share, fully franked, compared to 18.5 cents last year. The reduction represents an 82% payout ratio of operating earnings. This is a little disappointing considering the company could have maintained the dividend with an 86% payout or even increased the dividend with a payout just under 90%. Hopefully the total full-year dividend can be maintained or increased to preserve its dividend growth streak because long-term growth of the dividend looks assured.
The company provided an outlook for the rest of the 2018 year. If the soft market conditions continue for the rest of the year then under the new accounting standards operating EBITDA is expected to show a slight increase and operating EPS will show a mid-single digit decline.
On a like-for-like accounting basis management estimate a mid-single decline in operating EBITDA and a corresponding decrease in operating EPS.
Foolish takeaway
This result is clearly disappointing in the short-term, which is why the share price has fallen quite hard today. However, it has only dropped back to the price it was trading at in May 2018.
Management have downgraded expectations from a low-single digit to a mid-single digit decrease in FY18.
In the longer-term, management believe that these upgrades will be a key part of delivering sustainable double digit EPS growth.
After the dust has settled I will be looking to buy more shares in InvoCare as I believe in its long-term growth potential.
