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11 December 2020 | Buy

BUY | InvoCare Limited


An excellent turnaround opportunity

InvoCare Limited (ASX:IVC)

It has been a frenetic end to the year as the combination of the US election passing, continued Central Bank and Fiscal support, and now a very positive health/economic boost to sentiment from multiple COVID-19 vaccines passing Phase 3 trials provide encouragement. This reduced risk outlook should pave the way for further market gains as we head into 2021. As such stocks that have lagged due to COVID-19 restrictions should find renewed support and InvoCare Limited (IVC) fits into this recovery theme.

IVC is the largest provider of funeral, cemetery, and crematorium services in Australia, New Zealand, and Singapore. It has a number of well-known, highly respected brands and their significant market share provides scale benefits over smaller peers.

IVC has a history of resilient and rising revenue and earnings supporting dividend growth. However, the past year has been challenging as price competition coupled with a low flu season resulted in less demand for their services. Meanwhile, current conditions have meant social distancing measures have had a two-pronged impact on the business as better social habits have seen mortality and flu rates trend lower, while stricter numbers attending funerals have reduced demand for ancillary services (service chapel rental, flowers, etc) further impacting revenues and profits.

As a result of these short-term impacts to what is generally a stable and predictable business, the company has raised funds to restore the balance sheet and provide funds for growth as we move out of the crisis.

As a gradual reopening of the economy occurs we will see more normal conditions slowly materialise for the company. While there remains a chance that the second shutdown in Victoria may have stalled the earnings recovery this half (and earnings guidance may be lowered) we expect the market to read through this short term negativity and look to more normalised trading conditions that are likely to resume over the next few years.

IVC is an inherently defensive business over the medium term and represents an excellent turnaround opportunity, trading some 25% below their February highs and at levels we are happy to add a position to portfolios.



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