InvoCare Earnings: Result Overshadowed by Likely Takeover

We make no changes to our AUD 12.70 fair value estimate for shares in InvoCare IVC following the release of interim 2023 results. Underlying EBITDA slipped 1% to AUD 60 million as input cost pressure continues to weigh on profitability. We lower our 2023 operating EBITDA forecast by 12% to AUD 125 million—about 2% above the adjusted 2022 result. Much of the downgrade is due to the updated accounting treatment of prepaid funerals. Crucially, the difference in accounting does not affect cash flow. Our forecast would be lower by about 4% without this change. We expect improved profitability in the second half as price increases flow through, supported by some input cost moderation.

The change to our forecasts is immaterial to our standalone valuation and academic as we continue to expect TPG Global’s proposed takeover to proceed at AUD 12.70 per share. A scheme of arrangement process is underway. InvoCare indicated a scheme booklet with further information, including a complete timeline, should be sent to shareholders in September 2023, with anticipated completion in November 2023.

InvoCare’s wide economic moat is underpinned by intangible brand assets and cost advantages over a long tail of smaller competitors. We expect the firm to remain a dominant force in Australian funerals, and to benefit from the industry dynamics of Australia’s growing and ageing population. Mortality rates are a function of population size, average age, and life expectancy. From a base of 2019, we forecast the number of deaths in Australia to grow at an average rate of about 2% per year through to 2032.