Invocare...At the same time, Invocare is paying trade debts more slowly in the last two years. I would like to see both the last two measures stabilise and return to the historical

Copyright © Colin Nicholson Page 1

Stock Investment Journal

Invocare Important

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Therefore, the stock discussed in this journal may not be a suitable investment for you at this or any other time. I will only be discussing its suitability, or otherwise, for my investment plan.

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Understanding the Business Company Profile

Scope of Operations

Introduction InvoCare Limited (IVC) owns and operates funeral homes, cemeteries and crematoria around Australia, New Zealand and Singapore. Key funeral brands are White Lady Funerals, Simplicity Funerals and Singapore Casket. IVC also operates two Chinese memorial gardens, Lung Po Shan Chinese Memorial Gardens and Po Fook Shan Asian Memorial Gardens.

Funeral Homes IVC's funeral homes, both fully owned and leased, operate under the brand names White Lady Funerals and Simplicity Funerals. Within Singapore, IVC operates under the Singapore Casket company. IVC has 56 White Lady locations throughout Australia and 58 Simplicity Funeral locations throughout Australia and one in Singapore. IVC has 250 contemporary-style and heritage funeral homes in Australia, New Zealand, Singapore, and United States of America.

Cemeteries and Crematoria IVC operates 15 cemeteries and crematoria in Australia. The multicultural nature of Australia is recognised with burial, cremation and memorial options, including Asian sections designed by Feng Shui advisers, and the availability of architecturally designed crypts, vaults and family mausoleums preferred by many European communities.

Related Business IVC also provides services through HeavenAddress Online Memorials community- offer families a respectful online memorial community; LifeArt Australasia - offers beautiful, personal, emotional and environmentally-friendly coffins; and Guardian Plan - is an Australian prepaid funeral plan.

Disposal On 25 September 2017, IVC has announced that it has sold its Southern California cremation services business (Macera Crematory) in USA.

Source Stock Doctor

Invocare might not be a familiar name to many but it's the giant behind nearly 40 brands, including White Lady, Guardian and Simplicity and a range of local providers. It controls about one third of the funeral service market in Australia as well as multiple crematoria and cemeteries.

Invocare rejected accusations there was not enough competition. "We actually compete at a local level, so for instance, somebody on the North Shore of Sydney isn't going to go to a funeral director in Sutherland, so we are always competing with the guy down the road," Invocare general manager Joanne Place said. "That creates competition and we have that in every suburb."

For analysts, Invocare's pricing power makes it attractive. "[Funerals] are generally events that happen quite infrequently, touch wood, and therefore price discovery is a little bit harder in the market place," JP Morgan executive director Russell Gill explained. "One of the benefits of Invocare


is it actually has multiple brands, so the market may be unaware they are dealing with the same company." Invocare's Joanne Place disagreed and said the company was not hiding its reach.

Australia's population growth is also expected to help drive growth for the funeral sector. Current projections that the population will hit 40 million by 2030 should mean well over 200,000 funerals per year. "One of the benefits for the funeral service industry is that they've had volume growth for a very long period of time," Mr Gill said.

"Invocare was one of the few companies that was able to grow its earnings through the global financial crisis." The market has developed in a way that had seen funerals sold as packaged items.

Source ABC News

Activity Cycle

Short as far as funerals are concerned, but longer for funeral insurance.

Industry

Funeral homes, crematoria and cemeteries mainly in Australia, but also New Zealand, Singapore and United States

Market Share

Invocare is the largest private provider of Death care in the Asia-Pacific.

Invocare owns and operates a number of death care brands in the Australian marketplace. These include White Lady Funerals, Simplicity Funerals and Value Funerals. In Australia Invocare operate more than 270 funeral homes and 16 cemeteries and crematoria. These are operated under 3 national brands (White Lady Funerals, Simplicity Funerals and Value Cremations), and more than 30 regional brands that vary across the country.

Invocare controls about one third of the funeral service market in Australia as well as multiple crematoria and cemeteries.

Segmentation Analysis


Suppliers

I don’t have a clear idea on this as yet.

Customers

Anyone requiring their services.

Competitors/Substitutes/Disruptors

Local funeral directors.

Management

Invocare seems to be well managed.

Trend of Sales and Earnings

As we are very close to Invocare’s Half Year report in August, I have prepared my initial analysis for the last nine years.

Revenue growth has slowed down in the last two years

However, EBITDA has continued its growth trajectory


Likewise, statutory profit

Operating cash flow is more variable, though it shows overall growth

Free cash flow has retreated somewhat in recent periods. It was down in the most recent period and did not cover the dividend (see later).


Financial Risk

Working Capital

Working capital liquidity is healthy

Inventory fluctuates either side of 25 days

The last two years have seen inventory turnover go out to 35 days. This is not a concern yet.


At the same time, Invocare is paying trade debts more slowly in the last two years. I would like to see both the last two measures stabilise and return to the historical level of around 30 days.

Debt and Equity

Debt has been steadily reduced.

Interest cover is very strong.


The leverage ratio has reduced steadily

Debt to free cash flow shows more fluctuation above and below 5 times.

Profitability

Level and Trend of Profit Margins

Margins have strengthened again in the last two years.


Shareholder Return

Return on assets is down in the last year. I am not sure that I fully understand the reason.

Return on equity has declined slowly and is holding above 20%

Earnings and dividends per share show relatively steady growth.


The payout ratio lingers around 80%

Because free cash varies quite a bit, so does dividend cover. The most recent period saw a payout above free cash flow, which is not sustainable going forward.

Summary: Price versus Value and Returns

Invocare is cheaper than it was, but in absolute terms is not cheap. Great growth stocks rarely are.

RatiosChart Model GrowthMarket-based CriteriaAll Ordinaries AveragePrice/Earnings 16.68

Data for InvocareMarket Price $13.78

Price/Earnings 24.53

Margin of Safety - Price versus Value


Return on equity is well above my cost of capital although it shows a slow decline.

Dividend yield is below the market average, but quite strong for a growth model stock.

Market Liquidity

Invocare is a moderately large stock with a liquid market.

Timing and Capital Preservation

How I Found This Stock

I have watched Invocare for several years, looking for a reasonable entry.

Which Model?

Growth model – see charts on next page.

2017My Cost of Capital 12.5%Return on Equity #DIV/0! 22.1%Recent ROE trend down

Return on Equity v Cost of Capital

All Ordinaries index Average 5.09%Invocare 4.77%

Grossed up Dividend Yield

Market LiquidityMarket Capitalisation $m 1,519Av Buy/sell spread % 0.1Annual Turnover % 114.1Annual Turnover $m 1,733Av trade/day last year $000 6,933Av trade/day last 20 days $000 5,861Top 20 Ownership % 52.9


Chart Analysis

Invocare shows a long term upward trend. I have bought into the recovery from a sell-off

Set Stops

Low price used to base stops $11.40 Soft stop (one minimum bid lower) $11.39 Hard stop (2% below soft stop) $11.16

This is how the stops look on the chart:

98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18

1.802.00

3.00

4.00

5.00

6.00

7.008.009.0010.00

12.00

14.0016.0018.0020.00EXP MOV AVS 12(0) mnth 14.1542

M @ M 311203-310718 IVC - INVOCARE LTD > -0.8% -0.11 to 13.77

J FMAMJ J ASOND2013

JFMAMJ J ASOND2014

J FMAM J J ASOND2015

J FMAMJ J ASOND2016

J FMAMJ J ASOND2017

JFMAMJ J ASOND2018

9.00

10.00

12.00

14.00

16.00

18.00

20.00EXP MOV AVS 52(0) week 14.1713 W @ W 120713-060718 IVC - INVOCARE LTD > -0.8% -0.11 to 13.77


98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18

1.802.00

3.00

4.00

5.00

6.00

7.008.009.0010.00

12.00

14.0016.0018.0020.00EXP MOV AVS 12(0) mnth 14.1542

M @ M 311203-310718 IVC - INVOCARE LTD > -0.8% -0.11 to 13.77

J FMAMJ J ASOND2013

JFMAMJ J ASOND2014


J FMAMJ J ASOND2016

J FMAMJ J ASOND2017

JFMAMJ J ASOND2018

9.00

10.00

12.00

14.00

16.00

18.00

20.00EXP MOV AVS 52(0) week 14.1713 W @ W 120713-060718 IVC - INVOCARE LTD > -0.8% -0.11 to 13.77


Calculate Position Size

To invest 2% of capital, I am risking 0.38% of capital back to my hard stop.

Managing the Investment

On 5 July 2018 I bought 3,630 shares at 13.76.

Position size 1st tranche 2nd tranche 3rd trancheTotal Capital 2,502,110

Buy Price 13.770Hard Sell-Stop 11.160Risk 2.610 0.000 0.000

% Capital to Invest 2 2 2Position it buys 3,634 0 0

Max % Capital to Risk 0.5 0.5 0.5Maximum Position 4,793 0 0

Position allowed 3,630 0 0

% capital at risk this tranche 0.38 0.00 0.00Cumulative % capital at risk 0.00 0.00% capital invested 2.00 0.00 0.00

Rosncol SMSF


Updated to 24 September 2018 I have now been able to complete my analysis of the annual report, which follows:

Trend of Sales and Earnings

Sales growth has been negligible for the last three years.

Gross profit actually fell last year.

Statutory profit was also down in the last year. These three views are not what one would expect for a growth stock.


Operating cash flow was down significantly and…

Free cash flow was negative as the company invests in the business. The cash flow declines have implications for the sustainability of the dividend.

Financial Risk

Working Capital

No problem here.


Stock turnover has declined significantly in the last two years.

No problem here.

Invocare has been steadily tending to pay trade accounts more slowly. This is a potential problem sign.


Debt and Equity

Debt has grown substantially as Invocare invests in the business and buy more operators out.

The important measure of interest cover has shrunk for lower than at any time in the decade.

The leverage ratio is now equal to the decade peak in 2011. There is not much room to move here, so growth by acquisition may be constrained going forward.


And of course debt to free cash flow is heavily negative as the company invests in its facilities and purchases other operators.

Profitability

Level and Trend of Profit Margins

Importantly, Invocare is not sacrificing margins.

Shareholder Return

Return on assets has fallen a bit further.


Return on equity has kicked up, but return on capital is flat

Summary: Price versus Value and Returns

Earnings per share were down for the first time in the decade. The dividend per share was trimmed slightly.

The payout ratio has kicked up a bit.


This is an important problem – can the dividend be sustained in the face of falling free cash flow?

Invocare is still looking rather strongly priced.

Return on equity is well above my cost of capital.

Invocare has a yield above the market average now. This does not square well with seeing it as a growth stock.

RatiosChart Model GrowthMarket-based CriteriaAll Ordinaries AveragePrice/Earnings 16.62

Data for InvocareMarket Price $12.07

Price/Earnings 22.37

EV/EBITDA 13.5

Margin of Safety - Price versus Value

My Cost of Capital 12.5%Return on Equity 36.0%Recent ROE trend down

Return on Equity v Cost of Capital

All Ordinaries index Average 5.02%Invocare 5.33%

My Average Cost $ 13.77Dividend per share $ 0.45Effective yield 4.67%

Grossed up Dividend Yield


Market Liquidity

Invocare has a fairly liquid market in its shares.

Timing and Capital Preservation

When I bought Invocare I was seeing the chart as for a stock recovering from a fall.

Market LiquidityMarket Capitalisation $m 1,326Av Buy/sell spread % 0.1Annual Turnover % 114.8Annual Turnover $m 1,522Av trade/day last year $000 6,089Av trade/day last 20 days $000 5,744Top 20 Ownership % 52.9

98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18

1.802.00

3.00

4.00

5.00

6.00

7.008.009.0010.00

12.00

14.0016.0018.0020.00EXP MOV AVS 12(0) mnth 13.7113

M @ M 311203-280918 IVC - INVOCARE LTD > +0.3% +0.04 to 12.06


It is now obvious that what I saw as an opportunity to buy a resumption of the uptrend has deteriorated significantly.

Clearly my judgement was now faulty. I have sold my holding today at $12.14 and will await further developments.

Evaluation Against Investment Plan Model identification Growth model. Maybe this was a faulty judgement in hindsight. Capital invested 2% Diversification I did not hold a competing stock Max % capital risked 0.38% Liquidity Invocare is quite liquid. I had no trouble selling Buy Signal I bought into an uptrend after a severe correction Margin of safety It looked marginally OK at first, but I have been proved wrong Position building NA Profit-taking NA Sell-stop I sold out on a re-evaluation above my stops Re-entry I will keep watching it

J FMAMJ J ASOND2013

JFMAMJ J ASOND2014


J FMAMJ J ASOND2016

J FMAMJ J ASOND2017

JFMAMJ J ASOND2018

9.00

10.00

12.00

14.00

16.00

18.00

20.00EXP MOV AVS 52(0) week 13.776 W @ W 041013-280918 IVC - INVOCARE LTD > +0.3% +0.04 to 12.06

Result of investment $Total sale proceeds 44,024.13less Total purchase cost 49,999.00Realised capital gain/loss -5,974.87plus Dividends & Franking Credits 907.00Net total return -5,067.87% of capital -0.20

InvocareUnderstanding the BusinessUpdated to 24 September 2018

Evaluation Against Investment Plan

Documents

Invocare...At the same time, Invocare is paying trade debts more slowly in the last two years. I would like to see both the last two measures stabilise and return to the historical