Embattled funerals services group Dignity (DTY) now believes full year results will be ahead of previously downgraded expectations following a positive start to 2018, sending its share price soaring by nearly 18% to £10.96.

The company says price cuts are helping it to fight back against fresh competition.

The Sutton Coldfield-headquartered firm not only flags year-on-year sales improvement but also a first quarter EBIT (earnings before interest and tax) haul ‘significantly ahead’ of the board’s expectations.

Despite this good news, investors shouldn’t get carried away as the company is only a few months into a new pricing strategy. It could take up to a year to truly assess whether its new approach is working.

BACK FROM THE DEAD?

Dignity’s new pricing strategy lay behind a major profit warning in January which brutally hurt the share price.

Dignity - APRIL 2018

At the full year results (14 Mar), Dignity flagged encouraging signs from drastic initiatives required to fend off rising competition.

However, it warned of potential volatile trading throughout 2018 following the decision to cut some funeral prices and hold others. The reasoning was that ‘the relationship between funeral price, service and volume would take time to settle down’.

Dignity also said that in the first seven weeks, in the wake of cutting its simple funeral price, the number of simple (and cheaper) funerals conducted was at a run rate of 15%, below the 20% originally envisioned by the board.

ENCOURAGING QUARTER

Dignity now says the trend continued throughout the first quarter. The proportion of simple funerals as a percentage of the total continued below management’s expectations.

It is also important to note that overall deaths in the quarter rose 8% to 181,000 year-on-year.

This helped grow sales from £93m to £95m year-on-year, while EBIT of £37.5m was flat year-on-year, yet ‘significantly ahead of the board’s expectations’.

STILL EARLY DAYS

While Dignity shareholders will welcome the news, it is still early days in terms of the pricing overhaul and the risk of another profit warning hasn’t entirely gone away.

Indeed as Dignity, led by CEO Mike McCollum, cautions: ‘Despite this positive start to the year, the board still believes it is too early to conclude that the trading experienced in Q1 is indicative of the likely funeral price/volume mix going forward and the group continues to conduct a significant number of price and service trials across its entire portfolio.

‘The data from these trials is still at a very early stage and it is not yet possible to draw any meaningful conclusions.’

At the half year results in August, Dignity will update investors on the results of its trials and the review being carried out in conjunction with L.E.K. Consulting.

WHAT THE ANALYSTS ARE SAYING

AJ Bell investment director Russ Mould comments: ‘You can almost hear the desperation to keep a lid on expectations in the commentary which accompanies today’s first quarter trading update from Dignity.

‘Shares in the funeral provider halved in January as it responded to mounting competition by radically altering its pricing structure with significant implications for earnings.

‘Its initial assumptions on how many customers would take up its budget option are proving too conservative for now and accordingly it says results for 2018 will be ahead of forecasts while reiterating its belief that trading will be ‘volatile’.

‘The Dignity example underlines the old maxim that if shares fall 50% you need a 100% gain just to get back to breakeven.

‘Despite a 20% advance in the shares today, building on earlier gains post the full year numbers in March, they still trade more than 40% below the level they traded at before the profit warning earlier this year.’

Panmure Gordon analyst Michael Donnelly has upgraded his 2018 earnings per share forecast by 19% to 76.6p, though he prudently leaves his 2019 estimate unchanged at 66.1p for now.

Investec Securities says Dignity has reported a much stronger start to the year than it anticipated and adds: ‘We acknowledge that trading is still volatile as Dignity implements a number of price and service trials across its portfolio and the change in the number of deaths in the UK moderates over the course of the year.’

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Issue Date: 18 Apr 2018