The Good Funeral Guide Blog

Is Dignity overvalued, over-leveraged and operationally insecure?

Thursday, 14 March 2013

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A couple of copies of the Investors Intelligence have come to our attention. In them, financial analyst Aubrey Brocklebank entertains doubts about the viability of Dignity plc. 

He expresses himself very technically, so some of his argument and most of the graphs go somewhat over the heads of Team GFG. We’d be interested to know what they say to you.

Here are extracts from Brocklebank:

The bull-case on Dignity is very simple. It is a very safe, stable, and predictable business. People will keep on dying, despite any recession, and they will need to be buried or cremated. Dignity is also a very cash generative business and that has been exploited to use leverage to generate significant returns for shareholders.

It is a very simple and convincing argument, and it is one that has won over many institutional holders.

This argument is however seriously flawed.

The number of funerals or cremations per unit is dropping (as expected) though the only means that Dignity have been able to use to increase revenues is by price increases and acquisitions.

The cost of a basic funeral has risen 6.2% per annum since 2004. However it is the cost of burials, up 9.9%, that has caused much of this increase. Thus the 5.7% increase in prices posted by Dignity is above market average once one has stripped away the increased cost of burial.

This gives Dignity very little room to increase prices and remain competitive with the competition. It is also possible given the scale of Dignity’s price in comparison with the competition that prices could soon come down. This may not necessarily be due to like-for-like prices having to be reduced but customers opting for less expensive offerings … By cutting the amount spent per funeral Dignity could suffer a significant fall in earnings.

Whilst it may take some bravery to short this stock the low volatility of the share price, the low growth estimates, and the low implied returns, do mean that there is very little upside to Dignity even if all goes well for them, and they certainly lack the safety that the story would suggest!

Concerning Dignity’s acquisition of Yew Holdings at the beginning of the year, Brocklebank observes:

It is curious that the average price per funeral charged by Yew is £1565 compared to Dignity’s £2,350 when Yew have an EBITDA margin of 46% comparative to Dignity’s 34.7%. Thus their margins can only be held up by sales volumes. Should Dignity raise prices and find a significant fall in volume then they could see a significant drop in EBITDA.

If Dignity are not very careful with their handling of this acquisition it is quite possible that this could be the straw that breaks the proverbial back.

Find Brocklebank’s articles here and here

 

 

7 comments on “Is Dignity overvalued, over-leveraged and operationally insecure?

  1. Frank

    Friday 15th March 2013 at 7:46 pm

    As an independent, we were on their approved funeral service list as they had no offices in our area and people had also put our name on the pre-payment plan, not anymore, they were keeping a huge percentage for ‘administration fees’. Family’s that requested us as their preferred choice should have been notified by Dignity that we were no longer one of their approved FD’s, they haven’t!!!

  2. Friday 15th March 2013 at 8:25 am

    A large portion of Dignity’s strategy could well be hinged around their pre-paid funeral plan market. Pre-need prices dictating the increase expected in the newly acquired Yew branch at-need prices.

    • Friday 15th March 2013 at 9:28 am

      Hello Nick,

      I was wondering how long it would be before someone mentioned their ‘plans’.

      Their lucrative little arrangement with a well known charity for the elderly was a very cunning plan indeed.

  3. Friday 15th March 2013 at 6:41 am

    I’d agree with your argument to an extent David. Whilst the ‘pack em in’ cremation mentality will indeed save them money, surely the extras involved in a burial (limousines, memorials, expensive coffins) mean more profit, not less, which this article suggests will become a problem for Dignity.

    Your view (and mine) is that of a funeral director. The view of a financial analyst may well be no more than “burial is more expensive than cremation” – and it is this that I suggest may be a flaw in the view expressed in this article.

  4. Thursday 14th March 2013 at 8:39 pm

    Allow me to elucidate.. Burials take longer. The ‘operational efficiencies’ the big chains get, by slotting in two or three cremations a day per crew (hearse and bearers) is usually lost when the deceased wants to be buried.

    A burial may usually involve a Church service prior to the cemetery – that takes time and they charge for it. The other issues that increase the cost – customers opting for burial will tend to go for a more expensive casket option (bigger profit) and sometimes more limousines (more profit.) There’s also additional profit in grave-markers and memorialisation! (Our American cousins word, not mine.)

    As for the Dignity business model – I’ve been saying this for years, it’s vulnerable because of its desire/need for ever larger profits – it has to increase charges to clients to keep the investors happy. I believe a well funded new start operator could cause considerable damage to Dignity, if it targeted their busiest sites. Dignity currently quote over £3,000 for their starter service in most areas of the South – an eye-watering sum if you only want a fairly basic cremation. Their price inflation (driving up the cost of funerals) certainly helps the rest of us trying to make a living.

  5. Thursday 14th March 2013 at 8:00 pm

    “The cost of a basic funeral has risen 6.2% per annum since 2004. However it is the cost of burials, up 9.9%, that has caused much of this increase. Thus the 5.7% increase in prices posted by Dignity is above market average once one has stripped away the increased cost of burial.”

    It might be me, but I just don’t get this. Why does it make any difference whether a funeral is a burial or a cremation, since all costs associated with anything that makes a difference are disbursements? These should therefore make absolutely no difference to a funeral director’s profit.

    • James

      Friday 15th March 2013 at 8:48 am

      Andrew, I read those figures in a different way to David:

      The basic funeral inclusive of disbursements has increased by 6.2% per annum since 2004. Of these these a proportion are burials and burial costs have increased by 9.9% per annum. Once you strip out disbursements and in particular burial costs then basic funeral has only increased less than the increase that Dignity shows i.e. 5.7%. So the point is that Dignity price increases have been greater than the average so potentially they are pricing themselves out of the market and leaving no room to manoevre.

      I don’t think the small extra fleeting costs of burials are relevant to the quote/article.

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