InvoCare (ASX:IVC)

Martin Earp
CEO
Market Cap (AUD): 1.62B
Sector: Consumer Discretionary
Last Trade (AUD): 13.2 -0.6 (-4.56%)
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1. About

InvoCare, which is listed on the Australian Securities Exchange, is a leading international provider of funeral, cemetery, crematoria, and related services. It currently operates, and is a market leader, in Australia, New Zealand, and Singapore.

InvoCare currently operates 270 funeral locations and 16 cemeteries and crematoria, all in competitive markets in Australia, New Zealand, and Singapore. InvoCare employs around 1,800 people globally and has a current turnover of approximately $400 million a year.

2. Business model

 

The Group operates the following divisions:[1]

 

Divisions

Revenue ($’000)

% of total Revenue

Profit (before Int, Tax, Depn & Amort) ($’000)

Profit drivers[2]

Australian Operations

$402,240

86.3%

86.7%

  • The Australian business Operating EBITDA increased to $107.8 M (up 6.4% on 2016) in a market where the number of deaths increased by 1.7%
  • This result was underpinned by a strong result in the Cemeteries and Crematoria business (sales +8.9% and volumes up +4.3%), whilst the funeral business was challenged by the change in customer needs and the renovation work conducted in Q4 2017 (sales +0.2% and volumes -2%).
  • The strong performance of the Cemeteries and Crematoria business was driven by cultural, structural and remuneration changes made in 2015 which were designed to foster a collaborative approach to serving the customer. These changes are being applied to the funeral business and will complement the improvements to the physical product being rolled out in 2018
  • The focus on identifying operational efficiencies continued in 2017 and overall costs increased by only 0.9% YoY which resulted in the operating margin increasing to 26.4% (up 100bps on 2016)

Singapore Operations

$15,986

3.4%

5.5%

  • The New Zealand business Operating EBITDA increased to $10.8 M (up 13.1%). Strong case volume (+4%) was driven by a more tempered approach to pricing (case average up 1.2%) in a market where the overall number of deaths increased by 5.2%
  • Expenses increased by 4.2% which was driven mainly by the organisational restructure put in place to increase the capabilities of the local leadership team at the regional level and provide greater technical support from head office

New Zealand Operations

$46,621

10.0%

8.1%

  • The performance of the Singapore business was impacted by the planned closure of its main location for renovation as part of the Protect and Grow plan. This closure impacted performance in Q4 of 2017
  • Whilst the results were above budget, the YoY performance for Singapore saw Operating EBITDA decline to $7.2 M (-14.2%) with sales down 6.4% and volumes down 3.3%. It should be noted the overall number of deaths in Singapore decreased by 2% which further impacted performance

Other Operations

$1,116

0.2%

(0.3%)

  • InvoCare withdrew from the funeral business in the USA in February 2017 due to the difficulties faced with securing sufficient full-service cremation and burial cases from the ‘digital only’ platform. The IP generated from this investment has been utilised in the Australian business as part of the Value Cremations product offering
  • The business also successfully sold its crematorium business based in California (September 2017) to mark a complete exit from the US market. These decisions resulted in an Operating EBITDA loss of $0.2 M in 2017 which was substantially reduced from the loss of $2.3 M in 2016

3. Strategy

 

Key Strategies include:[3]

 

  • IVC is well positioned to meet the challenge of changing customer preferences through its investment in the Protect and Grow plan. IVC remains confident that this investment will deliver sustainable double-digit operating EPS growth in the medium to longer term
  • In 2018 the operational performance of the business and EPS growth will both be impacted by the Protect and Growth plan
  1. Operating EBITDA as closing sites for refurbishment will impact case volume, temporarily reducing market share and sales revenue growth
  2. Operating EPS in the forthcoming year, as depreciation and cost of debt, will increase whilst the benefits of the investment will not be material until 2019

 

In summary, it is expected:

  • Low single digit 2018 operating EBITDA growth
  • Flat Operating EPS

4. Markets

 

The Company operates in markets including:[4]

 

Industry (Australia)

Industry Revenue (2017)

Growth Rate (annual 13-18)

Funeral Directors, Crematoria and Cemeteries

$1 billion

1.6%

5. Competition

  

Major competitors include:[5]

 

  • Propel Funeral Partners Ltd (ASX: PFP)
  • Service Corporation International (NYSE: SCI)
  • Dignity Plc (LON: DTY)
  • Carriage Services, Inc. (NYSE: CSV)

6. History

 

2003[6]  

Invocare limited was admitted to the official List of Australian Stock Exchange Limited on Thursday, 4 December 2003

  

2006  

InvoCare announced that its offer to purchases 100% of the ordinary shares in Singapore Casket Company(Private) Limited(SCC) was accepted by SCC’s shareholders

  

2007  

Invocare Limited is pleased to confirm the successful completion on 1 March 2007 of its purchase of 100% of the issued shares of Liberty Funeral Pty Limited

  

2010  

Invocare referred to its announcement of 19 2010 advising that it has agreed to buy all of the shares in Bledisloe Group Holding Pty Limited (Bledisloe)

  

2011  

InvoCare’s Purchased of Bledisloe Approved by ACCC

   

2014  

In December 2014 InvoCare completed the purchase of Charles Crawford & Sons, an established funeral business located near Melbourne

  

2016  

The Dividend Reinvestment Plan (“DRP”) share price for the 2015 final, fully franked dividend payable on 8 April 2016 is $12.55

  

2017  

InvoCare Limited announces scaling back of US operations

InvoCare Limited to benefit from Sydney office building sale through funds under management

 

2018 

Announced the acquisition of the business and assets of J.A. Dunn Funeral Services (“Dunns”) based in Launceston, Tasmania.

7. Team

 

Board of Directors[7]

 

Mr. Bart Vogel – Chairman

Mr. Martin Earp – Chief Executive Officer

Mr. Richard Davis – Non-Executive Director

Mr. Gary Stead – Non-Executive Director

Ms. Robyn Stubbs – Non-Executive Director

Mr. Keith Skinner – Non-Executive Director

Ms. Jackie McArthur – Non-Executive Director

Ms. Megan Quinn – Non-Executive Director

 

Management Team

 

Martin Earp – Chief Executive Officer and Managing Director

Damien MacRae – Chief Operating Officer

Josée Lemoine – Chief Financial Officer

Fergus Kelly – Chief Marketing Officer

Lachlan Sheldon – Group Executive, Capital Management

Heidi Aldred – Company Secretary

Keiron Humbler – Group Executive, Business Operations

Steve Nobbs – Group Executive, Commercial Director

Amanda Tober – Group Executive, People & Culture

Wee Leng Goh – Chief Operating Officer, Singapore

Graeme Rhind – Chairman, New Zealand


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8. Financials

 

2018 Half Year Results Presentation

   

Financial Year 2016/2017 (ended 31 December):[8]

 

Divisions

Revenue ($’000)

% Change

Profit (before Int, Tax, Depn & Amort) ($’000)

% Change

Australian Operations

$402,240

1.6%

$107,786

6.5%

Singapore Operations

$15,986

(9.7%)

$6,792

(16.7%)

New Zealand Operations

$46,621

4.9%

$10,076

12.0%

Other Operations

$1,116

(59.3%)

($338)

88.7%

Total

$465,963

1.1%

$124,316

7.8%

9. Risk

 

Major risks include:[9]

 

The Board has overall responsibility and accountability for the management of risk within the business and management pursues the identification, assessment, control, and monitoring of its material risks to prevent or mitigate impacts to the business in line with its risk appetite. During 2017, the Company continued to review and refine its Risk Management Framework in order to provide a robust and effective strategy, strong governance, sustainable financial performance and a healthy and safe workplace for all.

The Board governs risks across a number of categories and its appetite to each is determined within the context of its industry sector – funeral services. These risk categories include:

  • Its Reputation
  • Legal Compliance
  • Safety
  • Fraud and Corruption
  • Customer Service
  • People
  • Environment
  • Its Competitive Environment
  • Non-Regulatory Standards
  • Commercial and Operational Decision Making
  • Acquisitions
  • Innovation and Transformation

The identification, assessment, and control of risks within each category is conducted in consultation with executives and senior leaders throughout the business as well as external consultants, and are incorporated into the risk register as appropriate. The Audit, Risk & Compliance Committee reviews and approves the risk register for adoption by the Board and further governance is provided through internal audit functions to assist in ensuring controls are understood, implemented and effective.

 

Financial Risk Management

   

Market risk

Cash flow and fair value interest rate risk

The Group’s main interest rate risk arises from long-term borrowings. All borrowings are initially at variable interest rates determined by a margin over the reference rate based on the Group’s leverage ratio. Borrowings issued at variable rates expose the Group to cash flow interest rate risk. The broad policy of the Group is to keep 75% of the debt, measured by individual currency, on fixed interest rates over the next twelve months by entering into interest rate swap contracts. The policy, however, provides flexibility to reduce the level of coverage in low-interest rate currency or when the interest rate outlook is relatively benign. The Group has entered into interest rate swap contracts under which it receives interest at variable rates and pays interest at fixed rates. The bank loans of the Group outstanding during the year had an effective average interest rate of 3.98% (2016: 4.64%) inclusive of swaps and margins but excluding establishment fees. At balance date, interest rate swaps for 75% (2016: 71%) of borrowings were in place. Of these interest rate swaps 25% (2016: 28%) were denominated in New Zealand dollar fixed interest instruments, with the balance denominated in Australian dollars. As at 31 December 2017, the weighted average fixed interest rate payable on the interest rate swaps is 2.89% (2016: 3.45%) and the weighted average variable rate receivable as at 31 December 2017 is 1.82% (2016: 1.85%).

As a consequence, the Group is exposed to interest rate risks on that portion of total borrowings not swapped to fixed rates and to potential movements in the margin due to changes in the Group’s leverage ratio. An increase of 100 basis points in Australian and New Zealand rates (2016: 100 basis points) and 50 basis points in Singapore (2016: 50 basis points) in the interest rate would result in additional interest expense after tax of $476,000 (2016: $415,000). A decrease of 100 basis points in Australian and New Zealand rates (2016: 100 basis points) and 50 basis points in Singapore (2016: 50 basis points) in the interest rate would result in an after-tax gain of $476,000 (2016: $415,000). Where possible, borrowings are made in the same country as the operation being funded to provide a natural hedge against currency volatility. Where this is not possible, other techniques, such as foreign currency bank accounts, are used to mitigate the profit and loss volatility due to currency movements. Due to the use of floating to fixed interest rate swaps, the Group has fixed interest commitments and the changes in the fair value of the future cash flows of these derivatives are recognised in equity to the extent that the derivative remains effective in accordance with AASB 139 Financial Instruments: Recognition and Measurement. The interest rate swap contracts were all judged to be effective at 31 December 2017 and the movements in the fair value of these instruments have been quarantined in equity. If interest rates decline by 100 basis points (2016: 100 basis points) a further $1,140,000 (2016: $1,144,000) net of tax would have been charged to equity and a 100 basis points increase in interest rates would have resulted in a credit to equity of $1,140,000 (2016: $1,144,000) net of tax

 

Foreign exchange risk

The Group rarely undertakes significant commercial transactions in currencies other than in the functional currency of the operating entity. Foreign exchange risks arise from recognised assets and liabilities that are denominated in a currency other than the Group’s functional currency, the Australian dollar. The major foreign exchange risk relates to the investments in controlled entities in New Zealand and Singapore. This exposes the Group to foreign currency risk on the assets and liabilities. Borrowings have been made in New Zealand and Singapore dollars to provide a natural hedge against the risk of changes in exchange rates.

The Group has no significant unhedged foreign exchange exposures at 31 December 2017. The Singapore dollar borrowing is undertaken in Australia and designated as the hedge of a net investment in a subsidiary. The New Zealand dollar borrowings are undertaken in New Zealand.

 

Price risk

The Group is the ultimate beneficiary of funds invested in various prepaid contract trusts. There are a significant number of trusts in existence with various investment profiles. Accordingly, the Group’s future income is sensitive to the price risk relating to the investment returns of these funds under management. These funds are invested in a range of asset classes with different price risk variables including cash, fixed interest, Australian and international equities, hybrids and direct and indirect property.

The returns of these funds are recognised in the income statement. An estimated 50% of the funds are expected to be realised over the next 10 years and 90% over about 25 years. In any one year approximately 14% of all Australian funeral services performed by InvoCare have been prepaid; a proportion that has been reasonably constant for many years and is not expected to significantly change in the short term. InvoCare monitors the asset allocations and investment performance at least quarterly and makes representations, where possible, to those in control of the trusts to mitigate price risks and enhance the returns which will ultimately impact InvoCare’s future results. As the funds are held in trust for relatively long periods, investment strategies take a long-term view of those trusts not restricted to more conservative, capital guaranteed assets. Historically, equities have provided the best long-term returns although the instability of the equity markets has caused a substantial shift in the investment bias towards more conservative property, cash, and fixed interest investments. When considering investment strategies the life cycle of the fund is considered so that funds which are closer to the end of their expected life take a more conservation investment stance than those funds continuing to receive new funds.

 

Credit risk

Credit risk is managed on a Group basis. Credit risk arises from cash and cash equivalents, derivative financial instruments, and deposits with banks and financial institutions, as well as credit exposures to customers, including outstanding receivables and committed transactions. For banks and financial institutions, only independently rated parties with a minimum rating of AA- are accepted. Credit risks in relation to customers are highly dispersed and without concentration on any particular region or sector. Funeral homes attempt to collect deposits at the time the service is commissioned both as a sign of good faith and in order to cover out-of-pocket expenses. Cemetery and crematorium products are generally not delivered prior to the receipt of all or substantially all of the amounts due.

 

Interest rate risks

The Group has no exposure to interest rate risk in respect of receivables as they are non-interest bearing.

 

Liquidity risk

Prudent liquidity management implies maintaining sufficient cash and marketable securities, the availability of funding through an adequate amount of committed credit facilities and the ability to close out market positions. Due to the relatively stable nature of the Group’s business, management aims to maintain a large portion of committed credit lines on a long-term basis.

The Group’s external debt financing is provided by four major banks in Australia and their New Zealand operations, where relevant, through bilateral revolver debt facilities totaling $390 million, $120 million expiring in December 2020 and $270 million expiring in July 2019. The facilities agreements’ covenant ratios are calculated on a rolling 12-month basis and have been met at 31 December 2017. The ratio of Net Debt to EBITDA (adjusted for acquisitions) must be no greater than 3.5 and the ratio of EBITDA to net interest must be greater than 3.0.

 

Capital risk

The Group’s capital management objectives and strategies seek to maximise total shareholder returns while maintaining a capital structure with acceptable debt and financial risk.

The capital management goals can be broadly described as:

  • manage the amount of equity and the expectation of returns - including dividend distribution policy, dividend reinvestment, and share buy-back policies
  • maintain debt and gearing that is prudent, cost-effective, supports operational needs and provides flexibility for growth and development
  • avoid excessive exposure to interest rate fluctuations and debt refinancing risk

References

  1. ^ Annual Report 2017, P 67-68
    https://www.listcorp.com/asx/ivc/invocare/news/annual-report-to-shareholders-1862547.html
  2. ^ Annual Report 2017, P. 05
    https://www.listcorp.com/asx/ivc/invocare/news/annual-report-to-shareholders-1862547.html
  3. ^ Investor Presentation 2017, P. 27
    https://www.listcorp.com/asx/ivc/invocare/news/2017-full-year-results-investor-presentation-1806272.html
  4. ^ http://www.ibisworld.com.au/industry/default.aspx?indid=675
  5. ^ https://simplywall.st/stocks/au/consumer-services/asx-ivc/invocare-shares/news/is-it-time-to-buy-invocare-limited-asxivc-based-off-its-pe-ratio/
  6. ^ http://www.asx.com.au/asxpdf/20031204/pdf/3k0bpbtv4vh1f.pdf
    http://www.asx.com.au/asxpdf/20060818/pdf/3y1gk45hysdbj.pdf
    http://www.asx.com.au/asxpdf/20070302/pdf/31195rxdpgwqn3.pdf
    http://www.asx.com.au/asxpdf/20101222/pdf/41vsdxbx5tmtwt.pdf
    http://www.asx.com.au/asxpdf/20110609/pdf/41z4bnxfc4kjvc.pdf
    Annual Report 2014, P15 http://www.invocare.com.au/content/dam/invocare/InvoCare%20Corporate/documents/reports/15_0217_31%20December%202014%20Accounts%20Final.pdf
    http://www.asx.com.au/asxpdf/20160329/pdf/4364033bqbxwkr.pdf
    https://www.listcorp.com/asx/ivc/invocare/news/scaling-back-of-us-operations-1521835.html
    https://www.listcorp.com/asx/ivc/invocare/news/invocare-to-benefit-from-building-sale-1692613.html
    https://www.listcorp.com/asx/ivc/invocare/news/acquisition-of-j-a-dunn-funeral-services-1831382.html
  7. ^ http://www.invocare.com.au/about-us/board-of-directors
    http://www.invocare.com.au/about-us/group-executives
  8. ^ Annual Report 2017, P 67-68 https://www.listcorp.com/asx/ivc/invocare/news/annual-report-to-shareholders-1862547.html
  9. ^ Annual Report 2017, P 08, 60-64
    https://www.listcorp.com/asx/ivc/invocare/news/annual-report-to-shareholders-1862547.html