@Barney07 Thank you for bringing up the topic of Pre-paid...

@Barney07

Thank you for bringing up the topic of Pre-paid Funerals; it is an important feature of IVC’s business which, as you pointed out, is often under-analysed.

To be sure we are looking at the right figures, it is probably helpful if we bring up the whole history of Pre-paid Asset/Liability mark-to-markets:



So, from an initial mark-to-market value of 232.1m$ (as of Jan 1st 2009), Pre-paid Liabilities have increased to a current level (as of Jun 30th 2018)of 491.3m$, corresponding to a CAGR of (491.3/232.1)^(1/9.5)-1 = 8.2%; assuming an annual mark-up in the order of 4.0% (in line with IVC’s annual price increases), the contribution from Net Inflows would then be around 4.2% pa.

On the other hand, Pre-paid Assets have increased from an initial mark-to-market value of 230.2m$ to their current 554.6m$, corresponding to a CAGR of (554.6/230.2)^(1/9.5)-1 = 9.7%; subtracting the 4.2% pa contribution from Net Inflows, that gives an annualised Total Return from investment (inclusive of both capital gains and distributions) of around 5.5% pa.

So, it is true that the historical growth in Pre-paid Assets mark-to-market has exceeded the corresponding growth in Pre-paid Liabilities by an average 1.5% pa. And that, over a 9.5-year period, has generated a Net Unrealised Gain of 63.2m$.

For the sake of a balanced assessment, I think it is fair to highlight the fact that, between FY08 and FY14, the Net Unrealised Gain was virtually nil, i.e. FUM Assets merely kept pace with FUM Liabilities; therefore, some caution should be used before extrapolating the current Net Unrealised Gain of 63.2m$ (accumulated between FY14 and FY17, in a period of rather lofty valuations across all asset classes) too far into the future.

The uneven outperformance of Pre-paid Assets vs Pre-paid Liabilities over time can be better visualised from the following graph:



Anyway, what is important to point out is that this is not the only gain that has been generated by the Pre-paid business. For, every time that a pre-paid funeral service is actually delivered, there is a realised investment gain (or loss) that flows into the corresponding year’s Operating EBITDA.

So, to be completely accurate, each year’s Operating EBITDA should be decomposed into an underlying figure “at cost” plus a realised gain (or loss) from Pre-paid FUM. In practice, calculating the actual amount of the realised investment gain is difficult, because it is the sum of the contributions from many individual funeral services contracted at different points in time (i.e. over many years).

But the main point here is that, whenever a Fair Value calculation is made for the Company’s Enterprise Value, the EV/EBITDA multiple used is applied to an Operating EBITDA figure that already incorporates a realised investment gain. And, by doing that, said investment gain is projected many years into the future.

Therefore, whether they know it or not, the analysts who come up with Fair Value estimates for IVC, based on EV/[Operating EBITDA] multiples, are also implicitly attaching a value to the future Pre-paid business.

To get a quantitative sense of how big that implied value is, let’s assume for instance that 12.5% of each year’s business consists in the delivery of pre-paid funeral services (which shouldn’t be far from truth). At the current Revenue run rate of ~450m$, that corresponds to ~56m$ coming from Pre-paid services; assuming an average 7-year period between contracting and delivery of the pre-paid service (which also shouldn't be far from truth), and a corresponding gain of (1+1.5%)^7-1 = 11.0% (consistently with the historical annualised net return previously calculated), that gives 56m$ * (1 - 1/(1+11%)) = 5.5m$ of Operating EBITDA coming from realised investment gains.

Applying an EV/EBITDA multiple of 14x (which is roughly where IVC is currently valued), that gives an implied value of 14 * 5.5m$ = 77m$ for the future Pre-paid Business, which happens to be broadly in line with the current Net Unrealised Gain of 62.7m$.

So, to conclude, I think the “upside factor” (as you like to call it) from the existence Pre-paid business is already fully factored in, even though it is often not mentioned explicitly.

Hope this helps clarify the matter, IMHO & DYOR.