Fallen funeral services provider Dignity (DTY) rallies 14.9% to 980p after flagging encouraging early signs from drastic initiatives needed to fend off rising competition.

Accompanying full year results which are reassuringly in line with January’s damaging profit warning, recent trading under a new pricing strategy suggests the demise of Dignity has been exaggerated.

Revenue and underlying pre-tax profit tax crept 3% higher to £324m and £77.8m respectively in 2017, a year in which the number of deaths was flat at 590,000.

Yet today’s ‘new’ news is that Dignity has hired L.E.K. Consulting to help develop a plan for the funeral business.

It will also help the company to understand the relationship between price, service and volume in order to develop a broader proposition for customers across a number of market segments.

angel in the sunlight (antique statue)

In January’s warning, Dignity spooked the market with the news it would be reducing some of its funeral prices and holding others in response to rising levels of competition.

This unexpected new pricing strategy drove savage cuts to analysts’ earnings estimates for 2018 and 2019.

Dignity decided to hold the average price of its traditional premium funeral at £3,800, but cut the price of its simple funeral by 25% to £1,995 in England and Wales and £1,695 in Scotland.

Dignity anticipates this new strategy will increase the proportion of cheaper simple funerals to 20%.

SIGNS OF LIFE

Initial analysis of the funeral mix in the first seven weeks of 2018 indicates only 15% of funerals are the simple ones, below the 20% the company had guided towards for 2018, while the number of UK deaths actually rose 7% over the first two months of the year.

Further detail on the impact of the new pricing strategy will be given at the first quarter update in May, with conclusions from L.E.K.’s review in August.

WHAT THE ANALYSTS ARE SAYING

Investec Securities says: ‘Whilst it is too early to determine the impact of the new prices, recent trading suggests some of our assumptions may prove cautious.

‘We leave forecasts broadly unchanged and reiterate our buy recommendation.’

Similarly bullish is Panmure Gordon’s Michael Donnelly who says he can see how substantial upgrades to 2018 earnings consensus forecasts may be possible in due course.

DELIVERY ON DIGITAL

Sutton Coldfield-headquartered Dignity invested £1m in its digital marketing last year and expects to spend a further £2m in the current year.

The internet is changing the nature of competition and is well positioned as the only operator with a national network of funeral locations and crematoria.

‘Work has continued to develop the group's digital strategy,’ says the company.

‘As at January 2018, our funeral website had the highest domain authority of any funeral related website in the UK and work continues in the development and optimisation of both our corporate and individual location's web presence.’

Dignity says that alongside continued investment in pay per click advertising, this combination of activities should help the increasing number of people using the internet as their reference source, find its new lower prices and the help and support they need from the business.

‘Allied to this, we have developed new systems to help our staff deal with online and telephone price enquiries more efficiently and professionally. This investment, combined with a broader range of services and price points will enable us to be more competitive.’

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Issue Date: 14 Mar 2018