InvoCare Limited

InvoCare Limited

InvoCare is the largest provider of funeral services in Australia, New Zealand (with operations in Singapore as well). Today, the company released their results for the 2018 full financial year, headlined by a substantial decline in net profit.

InvoCare declared a 57.7% decline in net profit after tax to $41.2m. This, despite reporting a 1.4% increase in the Group’s operating sales revenue, attributed to 11 successful acquisitions.

InvoCare claims that the poor operating results can be attributed to soft market conditions, namely, a lower number of deaths. This is corroborated by the Australian Bureau of Statistics (ABS), who estimated that deaths in Australia, InvoCare’s most prominent market, were down by 3.1% compared to 2017.

Additionally, according to the Department of Health, the number of people visiting medical practitioners for influenza was significantly down, approximately 67% lower than the 5-year average. ABS figures also confirm that two consecutive years of a declining death rate is extremely rare, and has not occurred since 1990/1991. This has prompted an expectation from InvoCare that the trend will potentially reverse.

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InvoCare’s lower comparative return on prepaid contract funds under management (FUM) in 2018 was a major contributing factor to their reported profit decrease. InvoCare experienced a $48.4m loss on prepaid contracts during the year. This was due to the impact of mark to market valuations of the contracts in a volatile property market. In 2017, property revaluations resulted in a decrease in the value of their property investments and thus an increased FUM liability, hence incurring the loss.

Other substantial comparative losses are related to depreciation and financing expenses. Depreciation expense was 22.5% higher than 2017, and finance (net interest) costs experienced a 60.3% rise.
However, these increased costs can be justified by the investments they are associated with.

InvoCare’s Protect & Grow (P&G) plan, which serves as an investment for future growth, is the primary cause of the surge in depreciation and financing costs. The plan saw 11 successful acquisitions (funeral homes) in 2018, as well as 55 locations renovated via refurbishment or growth. Thus, the high costs are a result of capital expenditure that will raise the value of non-current assets.

A market-leader domestically, InvoCare has experienced a rather difficult twelve months, reflective over their share price movements over the period. With that being said, InvoCare’s share price closed at the top of the ASX200, up 12%. Ultimately, the company’s growth moving forward is dependent upon the successful implementation of its Protect & Grow strategy.

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