Stan - yes I heard that as well and re-listened to it to make sure. The FD is clearly talking about underlying profits and if you take him literally it might imply that 2018 underlying earnings for the funeral and plan sales are being projected by him at £43Mill (after allowing some growth in profitability of the Crem business in 2018). With the plan sales likely to return around £9Mill (against £8Mill for 2017) this suggests he only expects the Funerals segment to generate £34Mill of underlying operating profits. Assuming their Jan 19 implied funeral sales of 29,300 Traditional, 13,400 Simple, 20,100 Plan and 4,200 Contract at the prices advised on Jan 19, that gives total Funerals revenue of £191Mill. The FD clearly thinks that underlying operating costs will rise from £142Mill in 2017 to £157Mill in 2018 (while revenues slide by 14%) - I don't.
Bernie - I absolutely take your point re my forecast not squaring with the "significantly lower" comment reiterated in today's announcement. But, I am not attaching too much to their statement and, instead, being driven by my own assumptions. I never believed Simple funerals could be 20% of all funerals in 2018 - given the lag effect the closing mix in Q4 would have had to be around the 25% level to achieve this 20% full year average. Also, I understand that Dignity might feel the need to repeat ONS estimates of deaths but I have a different view and estimate total deaths for 2018 at 600k. Registered deaths in GB are already ahead of last year by 7,000 (5.7%) for the first 9 weeks and, assuming the remainder of the year is flat with 2017, that would take total 2018 deaths to 597k. I am also not as pessimistic as the CEO in expecting Dignity funeral volumes to be lower in 2018 than in 2017 (as expressed in the Jan 19 announcement) although I understand his caution. With favourable results from pricing initiatives and increased deaths in the year, I estimate Dignity funerals performed at 72,000 - a turnaround from recent years. But why not 72,000 - they have reduced Simple funeral prices and held prices (for now) for the other offerings. These metrics would result in total revenue for the Funerals segment of £213Mill - only £10Mill shy of 2017!
But I could well be a little light in the operating cost areas. Dignity are regularly telling us that their Funeral costs are largely fixed so I have assumed little additional cost associated with an extra 3,200 funerals. But this extra volume is largely a net of 6,000 fewer of the more costly Traditional funerals and an increase of 6,700 of the Simple funerals and 2,700 of the Arranged funerals. Marketing costs and Director bonus costs will be higher for sure and I have factored this in but could be light.
I believe Dignity got its calculations wrong in January and guided accordingly and don't expect them to make a rapid climb-down. Q1 actuals might shed some light on this hypothesis.
Is there anyone else out there doing granular projections who would like to comment?
There was an easy 30 - 33% here if you simply realised that if you reduce the price - of a market leading offering you will easily sell more. 15 % is not the 20% they were after but its early days, the website needs re-jigged to appeal further and no doubt there will be twists and turns as things go quiet for the next few months.
Follow your gut instinct and have the faith to stick with your choices.
There have been some real easy gains of late in for instance British Gas, Dignity, Sirius Minerals, Interserve and Velocys and many more and some of those will have further big rises to come or present themselves cheaply again.
Did anyone pick up on a comment made by the FD this morning at the presentation to the effect that Crematoria would become approx 50% of profits?
See also page 18 in the presentation with analysis or underlying profits. The does this mean 50:50 before overheads which suggests Funeral Services profits fall from £79.5m to c£40m and this £40m fall translates into a fall in Underlying Operating Profit from £104.6m to c£64.6m
Translating the description of a "substantial fall" would suggest something of this order.
"Lifting the share price gloom surrounding funeralcare firm LSE:DTY: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 ..."
It's hard to square your figures of underlying operating profits of 95 million GBP with the equivalent figure just reported of 104.6 million
The outlook section of today's report says "As indicated in January, the Board believes that whilst the combination of action being taken will lead to substantially lower profits in 2018, it should create a new platform to allow many years of further stable growth." but you're forecasting a drop in underlying profits of a bit less than 10% ?
I think "substantially lower" means the board currently think there'll be more of a drop than 10%. Once that's out of the way, and they return to growth, then Dignity will again likely become a good investment.
Over the medium to long term, the current sp of just over £10 could well look like a bargain, but it's not so obvious in the short term ( ie the next twelve months ).
Totally agree on what you're saying about directors buying, and I'd expect a few RNS's to that effect in the next few working days.
BB - still on the sidelines .. looking in, but not tempted just yet.
After reviewing today's reported info and altering a few assumptions (2018 deaths, % simple funerals, total Dignity funerals and segment operating costs) I now project 2018 underlying Group operating profits at £95Mill. This EXCLUDES the costs of newly appointed Consultants and any restructuring costs incurred or provisioned and any new, currently unknown, pricing initiatives as well as all normal items regarded as exceptional items by the Group.
Underlying earnings, on same basis as above now, forecast at £52Mill for underlying eps of marginally over 100p.
Today's price uplift is fully justified and the appointment of Consultants (and alert to expected restructuring costs in 2018) is good news for the future.
Now that some info re early impact of price changes has been released to the market, the Directors can begin to buy and show their confidence in the future.
Thanks for the vote of confidence Ripley. I suspect TW has a better record of calling trades than I do; and I'm not 100% sure I was advising buying at768. I may have said it looked good value, but I was always waiting till we got some real feedback on how the new pricing structure was fairing.
Suitably reassured I did buy more this morning; but I believe they said (need to read the release in far more detail) although things had shown a marked increase with the new pricing; it wasn't quite as good as they were hoping. Also debt levels have always worried me about Dignity; so I would be happier to see that coming down a bit further.
Good to see them putting some emphasis on the Crematoria side, as this is far less susceptible to new entrants.
A lot of sense in your post, but it is amazing how personal behaviour varies from region to region, so such trials are not always fool proof.
Some years ago we ran a campaign for a Travel Agent based in the north East. We tried the Thames Valley & it went very well - people there were generally comfortable using a travel agent by phone or via the net; we then repeated the same campaign in South Wales; and it was a complete failure. There people only wanted to use local travel agents. I was surprised how local purchasing trends can vary.
All this could have been done by several trials and without such a big knock to the share price.
Done regionally in pockets initially to see the scale and effect for it then rolled out nationally. In that way consultants similarly would not have required RNS ing, just engage them. You ignore social media these days at your peril as significant retailing of any product is done online.
What alrms me most is that I am surprised that analysing cost / effect and elasticity of demand and customer experience was not actually being done as an internal HQ function and as part of any business information systems.
Interesting comparison with DTY, I agree growth by acquisition is often a dodgy business model. CVS is valued at about three times turnover whereas DTY only about one third more despite its much better margins. If I was a hedge fund I would short the former and go long the latter.
My biggest concern with CVS is it adopts a similar model to Dignity in that it races to buy up practices, at I assume rates that are very favourable for the independent owners. They do this also by spending more than twice the rate of the companies annual income.
This probably will force them to keep diluting the stock to raise more cash for the purchases -- seems a high risk venture, despite the supposed staid nature of the VET businesses.
Also the margins at 5% seem pretty risky for such a leveraged outfit.
Time will tell I suppose, but the share price could suffer big shocks in the same way that DTY has.
"""The company keeps saying the "primary" financial covenant is 1.5 EBITDA debt service cover but this implies there might be other financial covenants.""""
Has anyone done the analysis of the company's real exposure?
I've never known a company avoid paying the interest on it's loans, dodge the tax man and get away with it, and fail to replace depreciating assets, for which there are probably quite a few at DTY!!
EBITDA is the number applied to the covenant terms no doubt, but it would be far better to face reality and do the calculation of what a company's real income is, surely?
I think crematoria are even better - more capital intensive & full of legislative rules making it a difficult field for competition to enter. And, I believe (not checked figures to prove it) growing at a faster rate than burials.
I agree with this. Funerals should be a great business to be in. Very steady and predictable without much capital required nor disruptive competition. Generally speaking demand is relatively price inelastic - most people buy the service at an emotional time based on local reputation rather than price. Indeed some years ago I arranged my fathers funeral this way; there was a local company the family knew to use. Only later did I realise it was part of Dignity.
But management got too greedy, jacked up prices, loaded up with huge amounts of debt to strip out cash, make acquisitions to provide the illusion of growth and pump up the share price to enrich themselves. Ideally Dignity should be a private company owned with quiet dignity for the longer term and treating customers with more respect.
Anyway I'll leave everyone to it now. See you on the other side....
"Does a drop in the AIM-listed shares of Â£700 million veterinary services group LSE:CVSG:CVS Group merit buying into? Or is a softer trading statement, followed by a placing to prop up the show, more likely a 'sell' signal?There's also a wider ..."
At previous post 804p, having touched 824p. About half an hour later, bots taken price down in more tiny trades, so bought 2,500 shares at 783.6p at 1409, and guess what, the bots having been smacked turned upwards to 794p and now on the way down again at 787p.
Looking at the trades today so far, caveat as reported here, they seem mostly small I would guess automated trades this time following upward momentum so the share price got to 824p and somebody dealt at 817p in 9,000 shares, the largest individual trade I saw. Now 804p.
As I and some others on this board think, the shares seem to have some support at last, and this can be justified on the fundamentals, enough bad news discounted IMO.
I think you are right this will become a utility stock, so once settled down fairly predictable and safe. Always investors for steady eddie, inflation linked income stocks, and I think after the fall to this level there could be buying interest after the 2017 results which I am guessing may say trade in 2018 so far is not that bad but obviously too early to be sure how it will turn out over the year.
Directors will then be able to buy and I expect them to do so. Therefore I favour buying at least some shares ahead of the announcement, have just added at 767p.
It looks to me like DTY will probably survive,but will it be a growth stock ?
I would say probably not,it will probably have to work hard just to stand still.
So that is one reason why the fall in price,this company was priced for strong reliable growth and it will not be able to do that now.
Will results day show up any more bad news?
That's a possibility.
So I will wait for after results at least.
Maybe this will turn into a low growth income stock,a bit like a utility.
What you say chimes well with me, and I respect your 35 years of experience at this game, but FWLIW I reckon the CEO is a bright guy who has rightly been cautious and I think the covenants even on your numbers are unlikely to be breached. There is an additional covenant I think at 1.85 times EBITDA which would see the equity dividend go but nobody is in this stock for yield.
We shall see what is said later in March when the 2017 results are reported and there will have to be some comment however vague or qualified about how trade has been so far in 2018. If there are no more negatives than already in the share price, I suspect the share could rerate somewhat after a major fall.
Oh, I dont have any special insight and my analysis is very broad. Im not making any forecasts. I guess my point is over 35 years of investing Ive seen this kind of train crash unfold many times before and it ALWAYS comes out worse than the first profit warning.
I have no position short or long and before I take one will wait for at least two more profit warnings, change of management and Rights Issue. I hope you are right and if non of this bad stuff happens then great for all shareholders, I just see wishful thinking and not enough certainty to make me risk my cash.
I think you'll find that a 20% reduction to Funerals business is more like a £45Mill hit to EBITDA than your £60Mill. Even with Dignity's harsh assumptions about the mix and total Dignity funerals being lower this year vs last, 2018 EBITDA should still come in around £105Mill - and if they have been overly pessimistic on the Traditional funerals attrition rate, EBITDA could get to £115+Mill. I think the primary covenant requirement is not in jeopardy.
The company keeps saying the "primary" financial covenant is 1.5 EBITDA debt service cover but this implies there might be other financial covenants. If this starts to implode any other covenants previously thought immaterial might suddenly bite.
Anyway the debt service cost is £33m so EBITDA needs to exceed £49m.
Based on the 2016 AR covenant ratio EBITDA was around £112m but that before the actions now contemplated. A price reduction of 25% on Simple funerals which are currently only 7% by number doesn't seem much of an issue but Simple Funerals are expected to increase to 20%. What if this adverse mix trend snowballs with large price reductions required across the board to bring pricing back into line with competitors?
Suddenly earnings could look very different - 20% off revenues is a £60m hit to EBITDA and falls through to the bottom line and then swamped by £520m of net debt. Shareholders equity is already zero in the balance sheet...
How can you say the current price is a good entry point? The business model is broken and with further exposure of the price differential Dignity could suffer a triple wammy of adverse sentiment, falling sales values and inability to grow by acquisition. Big goodwill writeoffs will then hurt the P&L and balance sheet. I'm no shorter -that game has played out - but a big shakeout is needed to make this investible again.
Interesting stats, can the Scotland 27% increase be right, anyway obviously helpful to DTY and the others in that dismal trade.
The 2017 results statement in March must contain some hint or comment about trading to date in 2018, even if heavily qualified about being to early to tell etc, I would guess this is likely to be helpful to expectations about 2018 eps, which have been heavily talked down by the company and others, and the current share price of 780p.
But WDIK, for disclosure I am partly long a bit lower than 780p and intend to add on any weakness.
Yes but if something has changed significantly from the initial reason to purchase then you have to review, maybe they feel that DTY will go lower when the results come in.
Either way if DTY no longer fits there investment criteria then it's best to grasp the nettle.
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