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Dignity takes a dive

The funeral provider's shares lost half their value in a single day's trading following a profit warning
January 19, 2018

Amid the slew of recent retail trading updates, few people might have predicted that funeral provider Dignity (DTY) would be one of the sector’s biggest casualties. The shares fell by around half following a warning that it was caught up in a fierce price war, with new market entrants determined to undercut the incumbent.

IC TIP: Sell at 951p

The group said changing market dynamics will force it to cut prices for its simple funerals by roughly 25 per cent this year. It will also freeze prices for traditional funerals in the majority of its locations. That left results for 2017 – due to be announced in March – on track, but given the high level of fixed costs in this business, 2018 figures are expected to take a significant hit. Analysts at brokerage Peel Hunt have cut pre-tax profit forecasts for this year by a whopping 46 per cent to £47.8m. At present, expectations for pre-tax profit of £79m for 2017 and EPS of 126p have been left unscathed.

The question is, how quickly can Dignity rebalance its business to cope with the evolution of the industry? Management said its pricing decision was taken in the name of protecting market share. But analysts have pointed out that even bringing prices down by a quarter doesn’t make Dignity's funeral packages the cheapest on the market. The Co-op introduced a low-priced funeral in Scotland last September at £1,675, reducing the price by 16 per cent, while the cheapest service with Simply Cremation starts at £1,095. The brokerage estimates the total number of funerals sold by Dignity will decline by 2 per cent to 580,000 and that its market share will shrink to from 7 per cent to 5 per cent in 2018. The group also remains heavily indebted, although analysts admit even they need more time to work out the impact on free cash flow before predicting the change this will have on the group’s leverage position.