- Higher death rates don’t help the top ranks
- CMA’s regulatory action is a concern for the future
The old saying goes that the only sure things in life are death and taxes. It is the first, unsurprisingly, that drives the business of funeral service provider Dignity (DTY). It might sound gruesome, but it would be reasonable to assume that the pandemic has been good business for the group. Would higher death rates certainly lead to higher profits?
Not necessarily. Lockdown restrictions, the inability to offer “add-ons” such as limousines, and consumers’ tendency to simple funerals have all hurt. In addition, death rates have started to move in the other direction. In the second quarter, deaths were 4% below the 5-year average and management is aware that deaths from the pandemic could mean “we are experiencing a lower number of deaths than initially predicted by the ONS in 2022 and 2023 ”, which means lower volumes over the longer term.
The group continued to struggle with their top line. Revenue was down 4% and underlying operating profit 10% compared to the same period in 2020. Profitability returned, with pre-tax profit of £ 51million after loss of £ 12 million. This is explained by movements in the fair value of financial assets rather than higher items in the income statement, with fair value gains of £ 50 million recorded.
We also have to worry about regulatory measures. The CMA released its report on the funeral market last December. The competition regulator is, to say the least, not kind to Dignity in its literature. The CMA describes the group’s prices as “significantly more expensive” than its competitors and its profit margins as “symptomatic of a market that is not functioning well for consumers”.
Dignity will be negatively affected by CMA’s desire to see a more competitive market and cheaper funerals. Although price caps have been ruled out for now, this could be reconsidered. From September 16, all UK funeral companies had to comply with new requirements, including publishing a standardized price list online. We will have to wait for the annual results to see the impact on the group’s results, but it is unlikely to be positive as consumers become aware of cheaper alternatives.
Shares fell nearly 4 percent in the wake of the results. FactSet consensus estimates project EPS of 53.2p for the full year, then a sharp drop to 27.4p for 2022. With regulatory concerns and uninspiring interim results, we’re not convinced. To sell.
|ORDER PRICE:||722p||MARKET VALUE:||£ 1.84 billion|
|TO TOUCH:||708p-728p||UP TO 12 MONTHS:||969p||LOW: 391p|
|DIVIDEND RETURN:||N / A||P / E RATIO:||4|
|NET ASSET VALUE:||*||NET DEBT:||£ 519 million|
|Semester on June 25||Turnover (£ m)||Profit before tax (£ m)||Earnings per share (p)||Dividend per share (p)|
|* Negative shareholder fund.|
Latest IC Tip: Sell, 637p, Nov 19, 2020