Why funerals firm Dignity is still a 'buy'

Lifting the share price gloom surrounding funeralcare firm Dignity is going to take some time, given the scale of the January profits warning in which the company detailed the fierce price war raging in its sector.

But shares in the Sutton Coldfield-based company were at least moving in the right direction today as the release of annual results and news of some favourable trends helped trigger a 15% share price surge.

That January downgrade to 2018 forecasts stemmed from Dignity's launch of a new pricing strategy, with a 25% cut in the price of a simple funeral to £1,995 in England and Wales and £1,695 in Scotland. This had been expected to increase the proportion of simpler funerals in its business mix to 20%.

While it's still early days, Dignity said today that the past seven weeks of trading had in fact shown this rate to be closer to 15%. The price of a traditional funeral has been frozen, having averaged £3,800 in 2017.

Source: interactive investor      Past performance is not a guide to future performance

Dignity admits that resetting its pricing strategy will lead to substantially lower profits in 2018, but the company hopes that by doing so it will create a platform to "allow many years of stable growth".

It will provide further details on its pricing plans in the summer, having hired management consultants to review its funeral operations. The company is also in the process of developing a trial of new price and service combinations that it intends to launch in the second quarter.

Another factor in the share price recovery has been the 7% growth in the total number of UK deaths reported over the first two of months of 2018, compared with expectations for a modest decline against the 2017 figure.

Investec Securities, which made a 50% cut to its earnings forecasts for this year and next following the January warning, now thinks its estimates may prove too cautious.

Its analysts have left their forecasts unchanged for the timebeing while they wait for the funeral pricing mix to stabilise, but note that sales forecasts would rise by 5% if only 15% of funerals are simple and the number of UK deaths remain in line with FY17.

Investec has a price target of 1275p on the former FTSE 250 stock, while Panmure Gordon has an unchanged target price of 1410p. Shares fell as low as 771p following the profits warning.

Today's annual results showed a 3% rise in profits for 2017 to £77.8 million, with the final dividend held at 15.74p a share.

Chief executive Mike McCollum said: "Following the trading update in January 2018, we have now begun a new chapter for Dignity and for the funeral business in particular".