why the sell of?, page-6

update from macquarie September 13 2005 - Australasian Investment Review

A remarkable thing has happened in the funeral industry.

Despite Australia’s ageing population, of which we’re so often reminded, 2005 is shaping up as the third consecutive year in which the number of deaths across the country has fallen below the trend line.

Not surprisingly, the funeral industry somewhat relies on this number, being what might indelicately be considered the prime source of profitability. As Macquarie points out, the industry carries a high level of fixed costs and relative inflexibility to resource adjustment, for example in properties, staffing and vehicle fleets, to match fluctuations in the dearly deceased.

Macquarie reports recent data released by the Australian Bureau of Statistics indicates the number of deaths in 2004 was 132,200, well down on the prevailing trend rate (see chart). Leading gravedigger Invocare (IVC) notes further a 3-4% decline in the number of deaths in the first half of 2005, and the trend appears to have continued into July and August.

What’s going on? Have all those health warnings against eating, drinking, smoking and BASE jumping begun to pay off? Or was the warmest winter in decades the decisive element?

Macquarie reports Invocare performs around 15% of Australia’s burials and cremations. In NSW and Queensland, the only states where private ownership of
cemeteries and crematoria is permitted, the figure is 29%.

Despite the drop-off in drop-offs, Invocare reported a strong first half profit, Macquarie suggests.

Profits improved, the analysts say, due to strong cost control, real pricing increases, and incremental margin improvement from continuing higher returns on investment assets. Investment assets are funded by quaintly-named "pre-need sales". Sort of buy-before-you-die.

Macquarie notes that year-on-year, it is not unusual for the number of deaths to fluctuate by plus or minus 4%.

On this basis, given Invocare’s recent solid performance, it should be safe to assume the death rate must soon revert to trend, providing an added boost to Invocare’s potential earnings.

That said, Invocare does not have the running all to itself. For example, the new Macquarie Park (no relation to Macquarie Bank) facility in Sydney threatens to undermine Invocare’s market share, particularly at its nearby North Ryde facility.

As Invocare boasts a significant number of "locked in" contracts with funeral directors, Macquarie suggests Invocare will not be buried by the competition.

On a forecast of an upcoming death bonanza, Macquarie rates Invocare as Outperform, with a 12 month share price target of $4.62.