No dead certainties in the ASX-listed funeral parlour game

InvoCare Propel Funeral Parlours ASX PFP IVC
Despite the global pandemic, mortality rates have declined in Australia, forcing undertaker profits down.

One neat investment theory of the pandemic era is that the deathcare industry provides the perfect hedge against the human cost of the pestilence and the ensuing economic chaos.

But as with having blind faith in gold as a safe harbour, the notion of funeral parlours as a defensive certainty should be dead, buried and cremated.

This month’s profit results from the listed InvoCare (ASX: IVC) and Propel Funeral Parlours (ASX: PFP) show that while the virus toll is mounting – and no thanks to Victoria – other factors are keeping mortalities down.

For an industry predicated on fixed costs such as facilities, an ill wind bloweth.

Revenues decline on social distancing measures

One ‘problem’ is that social distancing and masks mean that influenza rates have plummeted – by as much as 95%%, according to Propel.

So too have vehicle fatalities: nationally, they’re down to about 70 (10%) year to date, while in mobility-deprived Victoria, the decline is more like 20%.

The other headwind is revenue per funeral has declined, partly because of limits on mourners. These restrictions have largely been lifted elsewhere, but in delinquent Victoria, a maximum of 10 people can attend funerals (including the celebrant, but not the deceased).

In New Zealand, where both InvoCare and Propel operate, a similar limit has been re-imposed in Auckland.

Smaller funerals mean less spent on the ‘extras’

Australia’s biggest funeral operator, InvoCare reported a first-half (January to June) net profit decline of 48%, to $48 million.

Management estimates the overall Aussie death rate declined 2-4% year-on-year, which is below actuarial assumptions.

Put in context, about 150,000 Australians drop from their perch annually, but small percentage differences can affect the funeral operators given their high fixed costs.

A key stat is that InvoCare’s case volumes fell 3.5% to 22,077 funerals, but group revenue fell more than 6% to $226 million.

Fewer mourners mean less of a cut on sandwiches, condolence books, flowers, tissues and more – it all adds up. The lack of an ‘audience’ means more bereaved families are opting for direct cremations and foregoing snazzy caskets.

Propel fared notably better, this week disclosing a 6% profit boost to $14.2 million, with volumes increasing 17% to 13,299.

One proviso is that unlike InvoCare’s numbers, Propel’s are for the full year and reflect less of the virus-affected period. Adjusting for acquisitions and other factors, volumes were down about 2.2% and revenue was flat.

Propel’s more granular numbers show that average revenue per funeral stood at $5,756 in the year to March 2020, but slumped to $4,972 in April. But by 20 June, the number had rebounded to $5,862.

With a circa 25% market share, InvoCare has a stranglehold on the fragmented sector via names such as White Lady and Simplicity. It also has a Singaporean presence.

Death rate expected to revert to the mean over time

Unlike the clients, the sector is down but not out. The benign flu season aside, the coronavirus has deterred patients from medical consultations and this is likely to result in an uptick of cancer and heart mortalities because of late diagnosis.

And unless the actuaries are wrong – and on mean weighted average, they’re not – the death rate will revert to the mean over time.

InvoCare in April replenished its coffins – er, coffers – with a $270 million capital raising. That’s just as well, given the company’s high gearing and a much needed $200 million refurbishment drive.

Some investors were surprised the company declared a $0.055 per share interim dividend.

While InvoCare points to a “subdued” second half (July to December),  Propel is more effusive, declaring itself “well placed to navigate COVID-19 disruptions and uncertainties.”

Performance wise, Propel shares take the honours: they gained 11.5% between listing  in November 2017 and the 30 June balance date.

Over that time, the ASX300 index retreated 1.4%, while InvoCare shares shed 41% (they’ve since lost a further 8%).

Adapting to shifting consumer demand

Over the longer term, both companies face the challenge of younger consumers preferring less traditional forms of dispatch such as eco-coffins, alternative services or even the Hunter S Thompson option of firing one’s remains from a cannon.

But just as the operators have adapted to the COVID-19 virtual funeral era, they will adapt again to shifting consumer demand.

After all, it’s not rocket science: just make sure the flowers arrive on time, the name of the deceased is spelt right and the hole is dug big enough.

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