Treasure Chest: Propel Funeral Partners

This story features PROPEL FUNERAL PARTNERS LIMITED, and other companies. For more info SHARE ANALYSIS: PFP

FNArena's Treasure Chest reports on money making ideas from stockbrokers and other experts. Today’s idea is on Propel Funeral Partners.

Whose Idea Is It?

Analysts at Evans & Partners

The subject:

Propel Funerals Partners ((PFP))

More info:

The largest funeral service provider in Australia and New Zealand, InvoCare ((IVC)), is set to be de-listed from the ASX in mid-November assuming shareholder approval of the takeover offer from private equity, which the board has endorsed if there is no counter-offer.

Private equity obviously sees value in death, particularly given an ageing population, as A&NZ’s second biggest funeral company, Propel Funeral Partners, revealed yesterday it has received “multiple” buyout proposals, but its board said none were compelling enough to start talks with any potential suitors.

The news has prompted Morgan Stanley this morning to reiterate its Overweight recommendation on Propel.

Last week, Evans & Partners initiated coverage of the stock with a “Positive” rating. The broker uses a three-tier system of Positive, Neutral and Negative reflecting outperformance, market in-line or underperformance over the next 24 months.

Evans & Partners is not alone in highlighting two major drivers for Propel, one being the ageing population but the other being a highly fragmented industry that offers M&A opportunity. It’s not just that the population is ageing, nevertheless, but also growing.

“Demographic tailwinds from an aging, growing population will see annual mortalities grow twice as fast as the past three decades”.

Since listing in November 2017, Propel has generated 24% compound annual growth in revenue, with 80% of incremental growth due to acquisitions.

Price competition is largely ineffectual in the funeral business, the broker notes, in which the larger players enjoy strong pricing power. Thus optimising pricing strategy, which traditionally is not an area of strength for the industry, is a key organic driver for recent acquisitions.

Evans & Partners further notes that given InvoCare has been the biggest acquirer in the space, further M&A would increasingly be curtailed by the regulator. This puts the experienced management at Propel in the box seat, as it will face reduced competition.

The broker’s view echoes that of Bell Potter, which back in August when the company last reported suggested growth is well supported by a strong underlying business with good pricing power in addition to the acquisition strategy in a large and fragmented market.

Bell Potter has a Buy rating and $5.70 target.

Earlier this month, Morgan Stanley named Propel one of its key picks, noting the company benefits from defensive and predictable earnings, anticipating low volatility in the death rate long-term. Morgan Stanley’s Overweight is accompanied by a $6.10 target.

Moelis is a little less effusive about Propel’s organic volume growth in the first half FY24, which it believes can be negative, but suggests volumes should again pick up in the second half as death numbers are anticipated to return to their long-term trend.

It’s sounding like a broken record, but Moelis has a Buy on an outlook supported by long-term drivers of demographic tailwinds in combination with a long runway of accretive acquisitions. Target $5.01.

Evans & Partners does not set a target price but does offer a valuation, which is currently at $4.64. The broker’s initiation was made when the stock was trading at $4.45, but it is currently at $4.60.

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