Funeral services provider Dignity (DTY) is marked down 6.3% to 633.25p after warning full year profits could materially undershoot expectations. This blow follows a disappointing first quarter caused by a ‘significantly lower than expected number of deaths’.
Sutton Coldfield-headquartered Dignity doesn’t expect the recent proportional death rate decrease to continue throughout the rest of 2019, but it warns annual operating profits could be as much as £3m to £4m below previous expectations nonetheless.
DEATHLY QUIET QUARTER
For the first quarter (Q1) ended 29 March 2019, the number of deaths fell 12% year-on-year to 159,000, continuing the low number previously reported by Dignity for the opening nine weeks of 2019.
The lower number of deaths likely reflects a tough comparator (a high death rate in Q1 2018) as well as the mild weather seen so far in 2019. It led to a 15% decline in Dignity’s sales to £81.1m and a worse than expected 42% Q1 slump in underlying operating profit to £21.7m.
The operationally geared group’s earnings decline was only exacerbated by a £190 year-on-year drop in average income per funeral, Dignity having lowered prices to fend off rising competition in the market.
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DREADED ‘SECOND HALF WEIGHTING’
Encouragingly, Dignity’s funeral market share continued to show a positive response to the updated service offering and more competitive new pricing strategy required to fend off rising competition, yet Dignity warns the ‘achievement of full year expectations will rely heavily on the number of deaths in the remainder of the year compared to 2018’.
As management explains: ‘Historical data over the last 20 years indicates that the final volume is likely to be within three per cent of the previous year. If deaths were 580,000 (approximately three per cent lower), then all other matters being equal, underlying operating profits for the full year could be approximately £3m to £4m lower than originally anticipated.
‘Clearly, this would require a significant increase in the number of deaths compared to last year in the second half of the year and would result in the financial performance for the year being more heavily weighted towards the second half of the year.’
COOPERATING FULLY
In March, the Competition and Markets Authority (CMA) confirmed its widely anticipated full market investigation into pricing within the funeral and crematoria sector. Dignity insists it ‘welcomes the investigation’ and is ‘cooperating fully with the CMA’s enquiries’.
Dignity's CEO Mike McCollum insists ‘our primary focus for 2019 remains the execution of our transformation programme, which seeks to build a more coherent, cohesive and technology-enabled business, geared to meeting the changing needs of our customers, whilst remaining focused on excellent client service. This will deliver our vision to lead the funeral sector in terms of quality, standards and value-for-money.’
THE ANALYSTS’ TAKE
Despite the latest profit warning, Panmure Gordon is sticking with its ‘buy’ rating and 900p price target for Dignity, explaining:
‘We reduce our full year pre-tax profit forecast by 9%, entirely based on the 12% fall in the number of deaths in Q1 2019 and the similar decline in April. However, we see this as another example of the natural variation in deaths rather than a change in the long term trend and therefore leave our full year 2020 and full year 2021 forecasts unchanged. We also note that Dignity flagged a slow start to 2019 at its full year 2018 results in March, and that the UK death numbers are freely available, perhaps explaining the recent share price weakness.’
Investec Securities also has a positive stance on the stock, although the broker lowers its price target from £11.50 to £11.30: ‘With the first quarter death rate decreasing 12% year-on-year, we lower our full year 2019 estimated EBITDA forecast (by 9%) to reflect the potential for lower annual volumes.
'We now forecast 575,000 deaths for full year 2019, down 4% year-on-year. Historical data suggests material declines in the death rate are unlikely to persist, nevertheless we now model cautiously on this and also maintain our cautious stance on average funeral income.'
