InvoCare: Heading in the right direction

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Alex Lu
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By Alex Lu
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Date posted:
01 March 2022, 11:30 AM
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  • InvoCare's (ASX:IVC) FY21 result (Dec Y/E) was slightly below expectations at the operating EBITDA line but better than expected at the operating NPAT line due mainly to lower net interest expense.
  • Key positives: Case averages returned to pre-COVID levels when conditions allowed; ROCE rose 240bp to 11.2%; Operating EBITDA margin increased 230bp to 23.8% reflecting operating leverage and good cost control.
  • Key negatives: Persistent government restrictions in Singapore pulled operating EBITDA down 5%; Inflationary pressures continue across the business.
  • We decrease FY22F operating EBITDA by 1% to $150.1m while operating NPAT rises by 4% to $58.6m due mainly to lower net interest expense.
  • Our target price increases to (login to view). With a 12-month forecast TSR of 7%, we downgrade our rating to Hold (from Add).

Good FY21 result despite lockdowns and restrictions

FY21 operating EBITDA was up 22% to $125.5m (-2% vs MorgansF and -1% vs Bloomberg consensus) and operating NPAT rose 50% to $45.1m (+9% vs MorgansF and +16% vs Bloomberg consensus). Despite disruptions and restrictions during 2H21, the result reflected a return to pre-COVID funeral case average (when conditions allowed) in Australia and NZ, 2.2% growth in funeral case volumes, continued growth in memorialisation sales in the CemCrem businesses, and contributions from acquisitions.

Australia performance was solid

Funeral Services Australia operating EBITDA jumped 29% with revenue growth in all markets (QLD and VIC were particularly strong) notwithstanding various disruptions during the year.

As funeral restrictions were eased, IVC experienced spend on higher service funerals and memorials which drove a 4.7% increase in funeral case average. We thought case average growth might have been more subdued post lockdowns due to ongoing consumer cautiousness, but the result highlighted the diversity of IVC’s business.

CemCrem Australia operating EBITDA increased 8%, which reflected a tale of two halves. While EBITDA rose 12% in 1H21, earnings were up only 3% in 2H21 due to lockdowns in NSW impacting several key memorial parks in 3Q21, significantly reducing foot traffic. This was only temporary however with the easing of COVID restrictions seeing a rebound in 4Q21. The emergence of Omicron also saw reduced foot traffic in January but IVC said conditions normalised in February.

Pet Cremations operating EBITDA of $7.0m (vs $0.5m in the pcp) reflected the contribution from the Family Pet Care and Patch and Purr acquisitions in late FY20. While off a small base, we think pet cremations will provide solid growth for IVC over the long-term with management estimating industry growth at ~9% pa vs the low to mid single-digit growth rate of the other businesses. Increased pet ownership in Australia will also be a tailwind.


No guidance has been provided with IVC noting the impact that COVID continues to have on its workforce, supply chain, operations, and client families is difficult to predict and presents an ongoing risk through FY22.

Nonetheless, IVC remains confident in the near and long-term potential of the business on the back of an ageing and growing population, mortality rates returning to long term trends, and increased pet ownership.

Changes to earnings forecasts and investment view

FY22F/FY23F/F24F operating EBITDA changes by -1%/0%/+1% while operating NPAT adjusts by +4%/+4%/+3% due mainly to lower net interest expense.

Our equally-blended (PE, EV/EBITDA, DCF) target price rises to (login to view).

While we continue to have a positive view on IVC over the long-term with the fundamentals of the business remaining sound (growing and ageing population), the recent strength in the share price puts the stock within 7% of our target price (including dividends). As a result, we downgrade to Hold (from Add) with our rating potentially reviewed on share price weakness.

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Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

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