Dignity plc (lon:dty)
Dignity – Higher Turnover And Drastic Profit Collapse

Dignity plc Financials

ItemCurrent PeriodPrevious Period
Year20202019
Period6 Months6 Months
Revenue£169m£155m
Earnings
Adjusted Earnings
EBITDA
Adjusted EBITDA
Statutory Profit(£14m)£58m
Adjusted Profit£27m£23m
Total Debt
Net Debt
Dignity plc Share Price
Grade:The Orange Grade - Shares That I Think Show Promise With A Few Caveats.
Title: Dignity – Higher Turnover And Drastic Profit Collapse
Company: DTY - Dignity plc
Share Price Then: 467p
Author: Ian Smith
Date: Wed 26 Aug 2020
Comments: When I last looked at Dignity a couple of years ago I was concerned that they were expanding by acquisition, incurring costs and losing volume per branch.

The first half of 2020 saw an increase in the total number of deaths in the UK to about 370k this was up by 23% on the 2019 figures, along with this came significant restrictions on the type and number of people allowed to be present at funerals.

As a result the first half of 2020 saw the company swing from a £58.2m profit to a £13.6m loss, with no obvious one off costs to account for it.

The number of funerals provided went up to 46,000 from 36,200 in 2019, which is a 27% increase and market share was reported as being pretty much flat. However this is a greater margin of error on market share numbers than usual as funerals are taking longer to arrange than is normal.

The basic numbers for volumes and prices
TypePeriodCost%
Full service funeralTypical£3.5k52%
Full service funeralH1 2020£3k26%
Limited service funeralTypical£2k14%
Limited service funeralH1 2020£2k37%
Prepaid funeralTypical£1.8k28%
Prepaid funeralH1 2020£1.8k28%
CremationTypical£0.8k7%
CremationH1 2020£1.2k9%
seems to support the idea that the group is only profitable when the full range of optional aspects of funerals such as flowers, limousines etc. are provided.

Head office, Central Overheads were up by £3.8m to £18.4m, while this doesn’t sound a lot a very large proportion of this is costs that are solely related to being a large company, the one man band funeral home doesn’t have many of these cost.

The CMA has been investigating the funeral market for a while and released an interim report on the 13th Aug which saw the share price jump from 390p to 634p but it seems to be returning to the pre report level.

Most of the reports seems to be that Funeral directors must have a simple price list and the rest seems to be waffle about good service.

It is expected that the FCA will get involved in Pre-Paid funeral plans which is a plus for Dignity as FCA regulation is likely to suppress any real competition in the market as only the big players can afford the time and cost of regulation.

Not at all unusually the company also produces underlying profit figures that are wildly different from the statutory ones, these show this year was a few % better than last year.
Read Count: 163

Buy/No Buy In A Nutshell
NegativesA big group that seems to be struggling with their costs in a market where many of its competitors are small owner operators. Seem to need big profits from ancillaries such as flowers and car to be profitable.
PositivesFCA regulation planned for pre-paid funeral plans which may hinder their smaller competitors.
Initial Review Price467p
Last Review Price520p
Last Review Date02-Sep-2020
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Previous Commentaries On Dignity plc
Date Share Price Author Commentary
Thu 01 Feb 2018920pIan Smith

Dignity – Management Telling It As It Is?



Dignity are a national provider of funeral and associated services and for the last few trading updates the management has been highlighting that customers are becoming more price conscious.

The big worry for me is that the more I look at the model, buy a local funneral director, operate as if nothing has changed and phase out the old owners the more I see questions about the number of funerals performed by each branch post acquisation.

It also seems that non-complete clauses are ineffective and many owners are simply starting up new businesses a few years later away from their original location but possbily re-acquiring some customers from their old now Diginity owned business.

Although all funeral businesses operate in a market where price is very important as often the expense is unexpected the customer is reluctant to complain openly to friends and relatives as it would be unseemly.

I suspect that this lack of open complaint and the reality being that most people only purchase one or two funerals in their life time has meant that the actual competition is far less than you might expect as first glance.

It is easy to see how this has lead to a market where the incumbent’s have become complacent, you have probably seen the TV ads for insurance/assurance policies aimed at covering the cost of funerals which talk of funeral costs in the £3 thousand to £5 thousand range.

In 2017
60% of Dignities funerals were full services averaging £3.8K,
27% of Dignities funerals were prearranged services averaging £1.6K,
7% of Dignities funerals were simple services averaging £2.7K,

The share price dropped on the news that Dignity are reducing the simple service to £2k and were predicting that this would replace about 13% of the full service funerals as well.

As well as the big price reduction they recently introduced the web based site Simply Cremations which is a provider of the cremations with the least possible formality, priced at around £1K plus it does seem that the company is not blind to what is going on in the market.

This does not mean that will be able to respond effectively, it may be that there is a conflict between a 1,000 branch business with managers motivated to upsell and the requirements of a funneral director's customers.

For me it as also worth noting that whilst independents may have a lower cost base a big player may have the ability to become the household name that you just go to along with the credibility to establish relationships with the Life Assurance providers; If you have policy type xyz we will organise the whole funeral and you will never see the bill.

Whilst debt appears to be high at around £580 million it is all fixed term loan notes at apprently resonable interest rates. Roughly a halving of profits would start to cause issues with the payment of dividends and agreed EBIDTA levels. Ratio must be above 1.8 for dividends and 1.5 for the debt.

I don't believe that people will buy funerals based on the cheapest price on a web comparison site, but being the highest price is likely to raise questions in the consumers mind.

So you have to ask; Is it time to end the illusion and brand all branches as Dignity and at 820p has it been oversold or has the market woken up?