Building A War Chest

InvoCare owns and operates funeral homes, cemeteries and crematoria in Australia, New Zealand and Singapore. The company has completed the institutional portion of its recently announced capital raising, resulting in gross proceeds of about $65m, or an additional $45m of capital given the cancellation of the underwritten dividend reinvestment plan.


The capital was raised at $14 per share, a 2.4% discount to the closing share price prior to the announcement. Given the recent rerating of the shares following the CY18 result, the raising wasn’t a major surprise. Interestingly, short interest in the stock has reduced, falling from an all-time high of 14.8m shares at the start of February to 12.1m shares currently.


Gearing has started to trend towards debt covenant levels, although we don’t expect the additional capital to change the company’s existing deferred capital expenditure plans for CY19. Instead, we think the capital will be used as additional firepower for acquisitions, particularly in the context of a listed competitor, Propel Funeral Partners (PFP, not covered), which has $10m in net cash and a $50m undrawn banking facility.


InvoCare’s balance sheet is looking stretched with a net debt to operating earnings ratio of 2.99x as at December 2018. That said, the planned slowdown in capital expenditure in CY19 following significant spending in CY18, and an expected recovery in volumes after the large unexpected decline over the important winter trading months in CY18, should put the balance sheet in a much better position by December 2019.


We maintain our Hold recommendation on InvoCare and recently trimmed our target price to $13.60 from $13.70 due to changes to our earnings forecasts.

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