We Expect InvoCare’s Funeral Share to Recover

We lower our fair value estimate for shares in InvoCare IVC by 5% to AUD 14.50 following the release of fiscal 2022 earnings. The result was weaker than expected, with underlying EBITDA lifting 9% on 2021 to AUD 136 million—5% short of our forecast. While funeral volumes and pricing have rebounded strongly, inflationary effects on the cost base, particularly labour, are weighing on near-term profitability. The reduction of our fair value estimate is twofold: Lost volume share in 2022 pushes out our market share growth forecasts; and we lower our margin assumptions on elevated costs in the near term and operating leverage from a smaller revenue base in the longer term. At current prices, InvoCare shares remain attractive.

InvoCare probably lost volume share in Australian funerals in 2022. The latest provisional mortality statistics from the Australian Bureau of Statistics indicate there were 174,717 deaths by Nov. 30, 2022—about 11% above 2021. This compares with InvoCare’s funeral volumes, which lifted 7% to Dec. 31, 2022. The firm called out capacity constraints, principally in labour, for struggling to capitalise on spikes in excess mortality. While deaths appear to be tracking about 15% above-trend in 2022, there were weeks in January 2022 when deaths spiked more than 30% above the base line, and more than 20% higher at points in February, June, and August 2022. Much of the increased excess mortality can be explained by about 9,000 deaths from COVID-19, which was largely contained in Australia prior to the easing of restrictions in early 2022.

But we expect volume share growth to resume in 2023. We estimate much of the spike in funeral demand was taken up by smaller firms, that likely had latent capacity and can more easily ramp up their labour force. With a portfolio of strong brands and a cost base, which can be spread across a much larger funeral base, we think InvoCare enjoys competitive advantages over smaller competitors, underpinning its wide economic moat.