After a couple of days having a few business meetings in The Promised Land it is back to the reality of the UK market...and a basic observation that we all know about competition in food retail but we are all still learning about competition in the business of death. And you know the stock market really, really dislikes unanticipated extra competition…
I am going to start with Wm Morrison (MRW). Food retail has been more competitive over recent years with the rise and rise of the German discounters, the deflation/disruption around the rise of online and the seeming debacle around the ongoing efforts to bring Sainsbury (SBRY) and Asda together.
However...we all need to shop somewhere for our food and Morrisons - driven by its sensible CEO David Potts - continues to deliver sufficient progress to push like-for-like revenues and underlying profits up. Meanwhile cash flow remains strong and debt has been chivvied down sufficiently for the company to pay a special dividend, which has pushed the total dividend to shareholders up above 5%. So sensible times at Morrison and inherently, despite all that headline competitive threat, it is a distinct hold here - akin to what I noted back here in January HERE.
By contrast, the funeral space continues to have new unanticipated extra competition. I have been writing cautiously on Dignity (DTY) for a while now, concluding HERE back in January that 'Dignity shares do not deserve to be in your portfolio'.
The shares have fallen substantially below now the ten quid share price support target and now are lurking below 750p. The basic problem is that not only are the numbers shabby (full year revenues down 3%, underlying operating profit down 23%) despite 'the numbers of deaths being as expected'. Why? Because slowly but surely the penny is dropping with consumers that they have been overcharged.
Dignity is being forced to eat its own profit margins with the introduction of simpler plans and the greater price compression opportunities offered by the introduction of internet funeral plans. It published in today's numbers that its average funeral cost fell below £3,000 last year (down just under 10% year-on-year) and I think we can guess the general below inflation prospective direction.
And there is even worse news. Pacing through the company's presentation document today, pages 20 and 21 are real shockers. The first notes that 'We expect the CMA (the Competition and Market Authority) to confirm a full market investigation...Resolution not expected until late 2020, possibly early 2021'. That's not good! And then on page 21 'We expect HM Treasury to confirm plans to regulate the pre-arranged funeral plan market'.
That's a double whammy of pain... In terms of how that impacts ultimate profitability, the company concludes that: “The Board’s expectations for the year ahead are unchanged from the most recent guidance. 2019 is likely to see underlying profitability lower than 2018 but in line with market expectations. In the medium-term the Board believes that targeting solid single digit increases in underlying EPS is appropriate and achievable.”
That is not very exciting...but we need to run a couple of numbers to really understand this. Net debt for Dignity despite all its best efforts remains above £500 million which is material given the market cap today is only £371 million. So a near £900 million enterprise value and (I reckon) £70-75 million only of operating profit in 2019 puts the stock on a forward EV/ebit multiple of around x12. That is neither cheap nor very expensive but given everything going on it is not cheap enough to me...despite the huge shafting the shares have had recently and over the last couple of years (23 quid a share anyone back on 2017?!!).
There is still no reason nor need to buy Dignity. We might not be able to buck death or taxes but - if you want to buy a necessity business - then if you forced me, I would push you towards some of the food retail names. At least in the latter sector space fears are more fully discounted.
Filed under: Dignity, chris bailey,
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