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Why this is one of my favourite ASX small caps

Propel Funeral Partners Ltd (ASX: PFP) is one of my favourite ASX small caps, it’s the second largest funeral operator in Australia.

It sounds like quite a morbid idea. It is morbid. But, as the saying goes, there’s only two things certain in life – death and taxes, and you can’t exactly invest in the ATO.

I love a good stat. ‘Death volumes’ are expected to grow by 1.4% per annum between 2016 to 2025 and then increase by 2.2% per annum from 2025 to 2050. This is a very sad, but very powerful, tailwind due to the ageing population of Australia.

Propel is adding further potential earnings firepower by making acquisitions, such as the one it announced this morning.

The funeral business is acquiring Gregson & Weight and three properties on the Sunshine Coast in Queensland. The Gregson and Weight families have been involved in funerals since 1897, but Gregson & Weight was established in 1972. It now has 40 staff and is the largest provider on the Sunshine Coast with around 1,650 funerals per annum from four locations.

In FY19 it generated revenue of around $12 million and will increase Propel’s annualised revenue by around 11%. The purchase price is $36 million in cash, which will be funded by Propel’s recently expanded debt facilities.

John and Jeanette Gregson, on behalf of the Gregson family, said “We have spent a lot of time considering who we could best trust to build on the success and reputation our family and staff have worked so hard to create over the years. We have been monitoring Propel’s progress and have been impressed with what they have achieved both here in Australia and in New Zealand, and their ‘business as usual’ approach appeals to us, as it has done with other industry leaders.

Foolish takeaway

It sounds like the Gregsons were courting more than one offer from their business. Perhaps InvoCare Limited (ASX: IVC) was in the picture?

Propel is indeed making good progress with its growth strategy. This acquisition will help boost the bottom line, as long as it doesn’t take on too much debt for the business to manage.

It’s trading at 22x FY20’s estimated earnings, which isn’t a bad price for a business with such a long growth runway in this lower interest rate environment. 

But I can understand why investors would rather go for a different share, like these top stocks which could be better for growth and income.

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Motley Fool contributor Tristan Harrison owns shares of InvoCare Limited and Propel Funeral Partners Ltd. The Motley Fool Australia has recommended InvoCare Limited and Propel Funeral Partners Ltd. 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 Scott Phillips.

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