Death is living up to its reputation as the ultimate defensive business.
Dignity, the UK’s only listed provider of funeral services, has issued a trading statement on Monday morning and business is err, booming.
In the first quarter of the year, operating profits rose 15.3 per cent to £20.4m on sales up 12.8 per cent. Operating margins were up 80 basis points. Shares in Dignity are currently up 40p at 578p.
Here’s chief executive Mike McCollum comment on the statement.
This is a very strong start to the year. All three businesses continue to perform well and we remain on track for the full year.’
The three businesses being funeral services, crematoria and pre-arranged funeral plans.
According to analysts the update highlights the resilience of the company and its reasonable valuation.
KBC Peel Hunt.
We expect Dignity to trade well through the recession. The majority of funerals are paid out of the estate of the deceased and thus should be relatively immune from a desire to limit spending. The key areas at risk (limos and memorials) held up well in the last recession and have not seen weakness in the current recession. Furthermore sales of pre-arranged funerals tend to pick up in a recession.
Panmure Gordon.
At current levels Dignity trades on 13.5x 2009E EPS falling to 12.4x in 2010E, which is close to historic trough levels when the business was floated in 2004. The valuation on an EV/EBITDA basis also looks reasonable on 9.2x in 2009E and 8.6x in 2010E, backed with an attractive FCF yield of 6.6% rising to 7.4% in 2010E.
Indeed.
But what FT Alphaville had not realised is that Dignity has actually indulged in some mutant finance, although in a much smaller way than someone like Punch Taverns, aka the Toxic Pub Company.
Six years ago, Dignity replaced all of its debt with £220m of “investment rated” securitised debt.
The debt was issued in two tranches at fixed rates of interest and listed on the Irish Stock Exchange:
• £110million Class A Secured 6.310% Notes due 2023; and
• £100 million Class B 8.151% Notes due 2031.
And three years later it issued some more.
On 20 February 2006 the Group issued a further £45.55 million Class A Secured 6.310% Notes due 2023 and £32.50 million Class B Secured 8.151% Notes due 2031.
Dignity argues that the nature of business makes securitisation an appropriate funding technique.
The Board considers that maintaining a leveraged balance sheet is appropriate for the Group, given the highly stable and predictable nature of its cash flows. This predictability is matched in the Secured Notes. The principal and interest on the Secured Notes amortise fully over their life and are completely repaid by 2031. The interest rate is fixed for the life of the Secured Notes and interest is calculated on the outstanding principal. This has the benefit of maximising shareholder returns, whilst leaving sufficient flexibility to invest in the growth of the business.
And who are we to argue with that. But securitising death? Is nothing sacred?