InvoCare’s Attractive Fundamentals Prevail

This story features INVOCARE LIMITED. For more info SHARE ANALYSIS: IVC

Funeral services provider InvoCare offers attractive operating metrics. Bell Potter initiates coverage on the stock.

-Investing capital to protect network and market share
-Attractive fundamentals support organic revenue growth
 

By Eva Brocklehurst

Funeral services provider InvoCare ((IVC)) is continuing with its strategy to invest capital to protect its network and stem market share losses going forward. The company's plans for growth are important as it cannot rely on acquisitions, given likely competition restrictions, as it has done in the past.

While market fundamentals remain the primary driver for growth, the extent of the stock's performance is likely to rely on the success of its "Protect & Grow-2020" plan, Bell Potter suggests. This plan is a $200m investment, announced at the beginning of the year, which includes a refreshing of both old sites and expenditure on new sites. The expenditure is planned over four years.

While most brokers expect this plan will limit short-term earnings growth it should be supportive of longer-term revenue. Morgan Stanley has flagged the additional capital expenditure is expected to return the business to sustainable double-digit growth in earnings.

The main positive aspect of the stock, for brokers, is the attractive fundamentals of the industry, which has helped the company achieve consistent organic revenue growth since it listed. Revenue is supported by providing funeral and related services, which are less affected by economic cycles.

The company also stands to benefit from a positive long-term trend in the number of deaths resulting from an increasing and ageing population. InvoCare operates in Australasia and Singapore and provides a complete offering, including funeral directing, crematorium, cemetery operation and related services.

Bell Potter observes the operating metrics are attractive, as returns-on-equity and returns-on-invested-capital are around 25% and 14% respectively, along with 100% gross cash conversion. These features support a high dividend pay-out ratio.

The broker, not one of the eight monitored daily on the FNArena database, initiates coverage on the stock with a Hold rating and $14.30 target. While Bell Potter has a positive view on the business it believes the stock is trading at fair value currently. Moreover, InvoCare also recently lost 90 basis points in market share which the broker would like to see stabilise.

Most brokers on the database suggest the stock may be defensive but its current valuation limits the upside, in the absence of earnings surprises. There are two Buy ratings on the database, two Hold and three Sell. The consensus target is $13.39, suggesting -9.0% downside to the last share price. Targets range from $11.50 (Citi) to $15.50 (Morgan Stanley). The dividend yield on FY17 and FY18 in forecasts is 3.0% and 3.2% respectively.
 

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