Why this ASX funeral share is well positioned for future growth

The InvoCare Limited (ASX:IVC) share price has continued its recent upward trend this morning and is trading for $11.17, driven higher by the widespread gains of the S&P/ASX200 Index (ASX:XJO) more broadly.

At the time of writing, the funeral home operator is trading at a 25% discount compared to its pre-COVID-19 highs of $14.92 earlier this year.

Although some investors may view the funerals industry as a controversial addition to their portfolio, here are 3 reasons I believe the current InvoCare share price has significant potential to outperform in the medium to long-term:

Successful capital raising

On 14 April, InvoCare announced it would tap institutional investors for $150 million total equity in the company at a price of $10.40 per share. The company cited that the raising would “provide enhanced support for its growth initiatives and further strengthen its balance sheet.”

The next day, however, the company revealed that over-subscription of the placement by investors had prompted its expansion to $200 million. This 25% enlargement suggests that there was significant demand for InvoCare shares and may be considered a positive indication that investors see sizeable growth opportunities for the company moving forward.

Track record of strong financial performance

The widespread impacts of COVID-19 will inevitably disrupt the short-term business operations of companies such as InvoCare. Despite this, the company’s track-record of stellar financial performance should provide investors with optimism that it will survive the challenging contemporary economic environment.

In its FY19 annual report to shareholders, InvoCare saw sales revenue rise by 3.5% to approximately $490 million, operating earnings before interest, taxes, depreciation and amortisation (EBITDA) grew by 21.4%, and net profits substantially increased by a whopping 54% relative to FY18. These figures were accompanied by a fully franked dividend of 41 cents per share, thus representing an annual dividend yield of 2.9%.

Lastly, InvoCare’s FY19 report discussed the acquisition of several regional funeral facilities as part of its overall growth strategy, including the purchase of Heritage Funerals (QLD) and Batemans Bay & Moruya District Funerals (NSW). These businesses will likely add to the 30% of existing market share that InvoCare currently holds in the funeral home industry.

This robust financial performance in FY19, combined with InvoCare’s fruitful acquisitions strategy, provide considerable opportunities for investors to benefit from the long-term earnings growth and profitability of the company.

Ageing population

According to the Australian Institute of Health and Welfare, 15% of the Australian population was included in the 65 and over category as of 2017, with this proportion of older demographics expected to inflate to 8.7 million people (22%) by 2056. If this projection is accurate, InvoCare appears well-placed to benefit from an ageing population. In the FY19 annual report, InvoCare CEO Martin Earp summarised this current demographic trend by stating:

The populations in our core geographical markets of Australia, New Zealand and Singapore are growing and ageing, with the first wave of the so-called baby boomer generation now impacting on anticipated death volumes. This positive demand profile is forecast to continue for at least two more decades.

To effectively meet this additional demand for funeral services, the company has embarked on a $200 million refurbishment program known as ‘Protect & Grow’. As of April 2020, 106 locations had undergone various improvements, and a further 74 sites are expected to benefit from renovations in FY20. Of particular interest, the Protect & Grow venture has seen mixed responses from shareholders, perhaps owing to their concerns that the up-front debt is weighing down the company balance sheet. This has arguably kept the share price lower in recent months.

However, I believe that this investment in the company’s infrastructure should be viewed positively by investors. InvoCare has recognised the long-term demand opportunities an ageing population provides, and is adapting accordingly to distribute the ensuing profitability of this demographic shift to its shareholders.

Foolish takeaway  

Fresh off its over-subscribed capital raise, I believe InvoCare is well-placed to emerge from the COVID-19 pandemic in a position of strength. The company has a significant portion of market share in a growing industry and has demonstrated a desire to further expand in the coming years through acquisitions and internal investment via the Protect & Grow strategy.

Although this company may be a buy-and-hold for the medium to long-term, I believe there is significant upside for prospective investors to include InvoCare shares in their portfolio.

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Motley Fool contributor Toby Thomas owns shares of InvoCare Limited. The Motley Fool Australia has recommended InvoCare Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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