Propel Funeral Partners: Defence (& Offense) In Volatile Times

This story features PROPEL FUNERAL PARTNERS LIMITED. For more info SHARE ANALYSIS: PFP

Analysts highlight Propel Funeral’s defensive attributes, with upside potential from organic revenue growth and M&A.

-Propel Funeral Partners’ interim result slightly missed expectations in February
-Analysts highlight defensive attributes and M&A upside
-Management noted “materially higher” total volumes in January

By Mark Woodruff

Following a volatile February reporting season for ASX-listed companies, Morgan Stanley has shone the limelight on the defensive characteristics of Propel Funeral Partners ((PFP)), the second largest provider of (the macabre sounding) death care services in the A&NZ region.

Owning and operating funeral homes, cemeteries and crematoria, Propel’s structural exposure to long-term growth in death rates and non-discretionary spending, along with management’s capacity to raise prices at least in line with inflation, should appeal to investors, is the suggestion made.

And did anyone mention the falling share price? In line with the unusually volatile February results season, and the Trump Slump continuing in March, the shares are off some -14% in less than four weeks.

According to Bell Potter, Propel Funeral’s pricing power is better than other consumer facing businesses in Australia. Plus there is significant scope for offence, setting aside circa $40m per annum for M&A, which Morgan Stanley points out is typically EPS accretive. More acquisitions is seen providing the most likely source of near-term consensus upgrades.

Already, the company has grown to 202 locations from just the one in 2013, garnering around 9% market share.

In a positive environment for acquisitions, the company operates in a space where it competes with a market leader, InvoCare, which has been losing share, plus a long tail of independent operators.

While Propel’s first half revenue and earnings (EBITDA) missed consensus expectations, Moelis agrees with Morgan Stanley on the positive outlook, and has upgraded its rating to Buy based on the company’s defensive characteristics, recent share price weakness, and valuation support.

(Although the latter has yet to kick in).

Interim results

First-half underlying earnings (EBITDA) grew by 9% year-on-year to $29.9m, yet missed the consensus estimate by -4% on lower-than expected organic volumes and average revenue per funeral (ARPF), explains Macquarie.

The underlying earnings margin declined by -60bps on the year prior to 26%, primarily due to executive remuneration changes, while opex/funeral growth proved in line with inflation.

Rising by 12% year-on-year, first-half revenue of $115m was supported by around 4% organic growth and 8% growth from acquisition contributions.

Revenue increased by 11.5% in the first half supported by 8.6% growth in funerals conducted, 1.5% growth in average revenue (ARPF), and 22% growth in sales through cemetery/crematoria.

Moving into the second half, total revenue in January rose by more than 10%, driven by a return to positive comparable funeral volume growth, plus growth in organic volumes and a higher ARPF.

In the trading update provided with the interim results, management noted “materially higher” total volumes in January due to M&A.

Management anticipates organic volumes have largely rebased post-pandemic and expects growth to align with long-term industry trends in 2025.

Macquarie concurs, noting organic earnings have now stabilised and thus is projecting Propel’s organic revenue growth to increase to around 5% from 4% over the medium-term, contingent on fluctuations in death rates.

M&A

Over the last 18 months, global M&A activity in the deathcare industry has been heightened, observes Moelis, with takeovers of InvoCare in Australia, Dignity in the UK, and Park Lawn Corp in Canada.

Highlighting Propel’s potential attraction to a suitor, this broker points to predictable cashflows and an outlook supported by both demographic tailwinds and a long runway for accretive acquisitions, given the 70% of market share owned by independent entities.

In FY24, $100m in acquisitions were undertaken by Propel, and at interim results management announced the first acquisition for FY25, a -$7.3m cash/script-based acquisition of two businesses in New Zealand. These collectively perform circa 600 funerals per annum, generating around $3.7m in yearly revenue.

As part of the transaction, Propel will acquire seven properties, including three cremation facilities.

Propel’s total freehold property portfolio, valued at around $240m, is a strong hedge to the net gearing level, suggests Bell Potter.

At the end of the first half, net debt of $124m was down from $175m in the previous corresponding period, representing leverage of 1.9x times, well below the 5x times covenant.

The board declared an interim dividend of 7.4 cents, a rise of 2.8% year-on-year.

Outlook

Propel’s long-term fundamentals remain attractive, in Macquarie’s view, with M&A continuing to represent material upside risk.

As organic volumes continue to be positive, and around $144m in funding capacity is deployed, Moelis expect top-line growth and modest operating leverage to drive EPS growth across FY25-27 of 4%, 15%, and 9%, respectively.

There are four brokers monitored daily who conduct research on Propel Funeral Partners in the FNArena database, three have Buy ratings (or equivalent), while Accumulate-rated Ord Minnett is yet to refresh its research for interim results.

Post results, the average target of the four brokers fell to $6.39 from $6.66, which suggests 23.5% upside to the $5.17 closing price on March 11.

Outside of daily coverage, Moelis has lowered its target to $6.10 from $6.20 and upgraded to Buy from Hold.

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