No pandemic revenue bounce for Dignity

The old proverb goes that the only certain things in life are death and taxes. It is the former, unsurprisingly, that drives the business of funeral provider Dignity (DTY). It may seem macabre, but it would be reasonable to assume that the pandemic has been good business for the group. Surely higher death rates would lead to greater profits?

Not necessarily. Lockdown restrictions, being unable to offer “add-ons” such as limousines, and the consumer trend towards simple funerals have all hurt. Further, death rates have started to move in the other direction. In Q2 deaths were 4 per cent below the 5-year average and management are aware that deaths brought forward by the pandemic could mean “we experience a lower number of deaths than originally anticipated by the ONS in 2022 and 2023” meaning lower volumes over the longer-term. 

The group has continued to struggle with its top line. Revenue was down 4 per cent and underlying operating profit down by 10 per cent compared to the same period in 2020. Profitability did return, with £51m profit before tax after a £12m loss. This was driven by fair value movements in financial assets rather than anything higher up the income statement, with £50m fair value gains recorded. 

There is also regulatory action to worry about. The CMA published its report into the funeral market last December. The competition regulator is, to put it mildly, not kind to Dignity in its literature. The CMA refers to the group’s prices as “significantly more expensive” than competitors' and its profit margins as “symptomatic of a market that is not working well for consumers.”

Dignity will be negatively impacted by the CMA’s desire to see a more competitive market and cheaper funerals. While price caps have been ruled out for now, this could be revisited. From 16 September all UK funeral companies had to comply with new requirements which included publishing a standardised price list online. We will have to wait for the full-year results to see the impact on the group’s results, but it is unlikely to be a positive one as consumers become aware of cheaper alternatives. 

Shares were down by almost 4 per cent in the aftermath of the results. FactSet consensus estimates forecast an EPS of 53.2p for the full-year, and then a steep drop-off to 27.4p for 2022. With regulatory concerns and uninspiring interim results, we are not convinced. Sell. 

Last IC tip: Sell, 637p, 19 Nov 2020