15-Oct-2020: Moelis Australia: PROPEL FUNERAL PARTNERS LTD: BUY: Strong 1Q operational performance given challenging conditions
Analyst: Ronan Barratt, +61 2 8288 5426 [email protected]
EVENT: 1Q FY21 Update.
1Q operating EBITDA $10.5m (+18% vs. pcp.) – this reflecting strong cost control; resilient pricing (2%-4% growth on pcp.), assistance from government subsidies; and incremental earnings from historical acquisitions. Together these offset what remain very weak comp death volumes.
Industry commentary: flu cases ~99% below 5yr average; TAS deaths down 12.6% on pcp.; social distancing / travel restrictions / increased personal hygiene could result in a deferral of death volumes into future periods.
IMPACT
Overall, 1Q performance was ahead of our expectations, and particularly strong given the operating
We increase our FY21e EBITDA by 3.5% to $37.6m, reflecting the stronger than anticipated 1Q. This implies yoy growth of ~17%. Through the remainder of FY21, we expect weak death volumes are more than offset by higher pricing; tight cost control; and incremental earnings from acquisitions.
INVESTMENT VIEW
Notwithstanding persistently weak comp death volumes, PFP has recovered its average revenue per funeral to exceed pre-Covid levels. Pricing should remain supported by the gradual relaxing of funeral restrictions and increased mourner attendance.
We note PFP retains a strong capital position with funding capacity of >$60m (post binding acquisitions and final FY20 dividend payment). Drawn debt has an attractive effective rate of 2.7%. This attractively priced capital places PFP in a strong position to continue executing on accretive acquisitions. We expect that in time, Covid may accelerate this acquisition pipeline, albeit our published estimates currently assume no new acquisitions until FY22.
While caution over near-term death volumes and regulatory uncertainty (ACCC) remains warranted, we see this is as sufficiently reflected in the current share price. The long-term outlook for the business remains highly attractive given the compelling demographic tailwinds driving organic growth; plus a long runway of consolidation opportunities.
Further, we note that historical trends suggest CY20’s contraction in death volumes is highly likely to mean-revert in either CY21 or CY22.
We upgrade to a BUY rating and $3.34 target price. Our target price implies ~19x FY22 P/E which we deem reasonable given the outlook.
Propel Funeral Partners Limited:
- Ticker: PFP
- Stock Price: $2.88
- Target Price: $3.34
- Forecast Capital Return: 16.0%
- Forecast Dividend Yield: 2.8%
- Estimated Total Return - 12 Mth Forward: 18.8%
- Market Cap: $284.4m
- Free Float (%): 70.0
- Enterprise Value: $344.9m
- 52 Week Range: $2.18 - $3.65
- Shares Outstanding: 98.7m
- Avg. Daily Value Traded: $0.3m
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