Author Topic: DTY.L - Dignity Funeral Services  (Read 3723 times)

DRValue

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Re: DTY.L - Dignity Funeral Services
« Reply #10 on: March 08, 2018, 07:04:22 AM »
What are your thoughts on the short thesis and the lack of insider ownership? Historically the management has owned almost no shares.  What kind of insider activity has there been since the price drop?

https://funeralbooker.com/blog/dignity-report/

I'm going through this now. I'll attempt to put my view next to each point in the report, you'll need to read along with the short report for it to make sense.
Sections in bold, report text in italics.
There will be some assumptions made, I don't have access to as much detailed data as the short report seems to have. Responding to these are good because they keep you honest and make you articulate your thoughts beyond "I like Dignity Funerals"

Recent Director Deals (December 2016 to present):
There is no real argument to be made that insiders selling is a good thing. However, I would say that based on my valuation they have sold at the top which is rational, especially if you know that the business will have lower profits soon based on the state of the market. Also they are sales presumably following grants of options which are part of their remuneration package.
I would like to see insider purchases at the current price level (£9) we'll see what materializes in the coming months.

1. Short Thesis Summary:
Branch expansion has functioned to keep the number of funerals performed steady, offsetting a +30% collapse in branch productivity
Pricing has been used to provide constant top-line growth
We believe this strategy will no longer be available to Management and that both branch expansion and price increases are now unsustainable.


All of the above 3 points reflect a strategy that was working. If i think of simple economics what they've done is gone for price and not volume which I would assume has lowered direct costs (less services require less staff per store) and thus increased margin. We're now at a point where the pricing is too high and I'd expect prices to fall, costs to rise and volumes to increase.

We do not view Dignity as being a premium provider owing to:
The collapse in branch productivity. Why would a company with strong a strong product see a 30% collapse in branch productivity?


I'd put this in the same bracket as above, price over volume.

Dignity does not operate as a national brand. If the product offered is really at the premium end, why does the Company use over 500 different trading names across the country?

I do think I'd like a single brand here and more uniform customer service and store aesthetics. Some of the pictures of stores in the report leave much to be desired. But I do believe funerals are a local business, and if the reputation is there, why would you want to mess with what is working?

Based on this view, we have provided a financial model showing how a pricing reduction of 3.0% per annum between 2018 to 2021 impacts forecast EPS. This model produces a downside to analyst consensus estimates of EPS in 2018 and 2019 of 7.3% and 14.3% respectively.

Pricing falling but market share staying the same? Seems a little one sided to me.

2. Background Information
2i. Dignity Plc

Funerals are a local service and, as such, require a physical branch location from which to serve the customer.
These branches often serve as the mortuary or viewing areas.


This to me is part of the bull thesis. If you need to go local and Dignity owns the local operator, this is half the battle won. It's not as if they have a bunch of redundant stores. Its not as if Amazon can swoop in and take away the business.

2ii. UK Funeral Market
The UK funeral market is made up of two key business types:
Funeral Directors – this includes Dignity, Co-op and smaller funeral directors. The funeral director is the key contact point with the customer and arranges all aspects of the funeral. They provide the practical services (e.g. collecting, storing and preparing the body), professional services (e.g. assisting with statutory documentation and arranging the funeral event) and pastoral services (e.g. supporting the deceased’s family through the grieving process).
Crematoria and cemeteries – these are the locations where the funeral actually takes place. There are 282 crematoria in the UK and thousands of cemeteries. Most crematoria are owned by local councils and Dignity is the single largest operator with 44 crematoria. Cemeteries are typically owned by local councils or churches. Very few customers transact directly with the crematoria or cemetery, as funeral directors will typically arrange the logistics and payment on behalf of the family.


Cemeteries are church or local council owned, not owned by Dignity (for a point made in a previous post)

The remainder of the UK market primarily comprises small businesses typically with 1-3 locations. This means that, compared to other markets, the UK funeral market is still relatively fragmented with somewhere between 60-65% of branches operated by small, local businesses.

I like to see this, consolidation is possible there's no real large competitor outside of the co-op.

The barriers to entry for a new funeral business are relatively low. There are no necessary licenses or regulations to comply with apart from health and safety regulations that cover storage and preparation of bodies. The largest barrier historically has been the need to have a local, well-established reputation. This barrier has been eroded in recent years with the advent of new channels to reach prospective customers (social media, online comparison sites) as well an increased propensity for customers to shop around and try new businesses.

I believe Dignity are pushing for more regulation, which they'd only do if it was positive for them and this would likely make barriers to entry harder if a licence is required.
I don't believe the internet will be a huge factor in selection, to me it comes down to locality and reputation with cost not being the most important factor. Whose going to risk a poor funeral for someone they care deeply about for the sake of a one off £1426 (Dignity average premium) if they're not sure of the reputation of another provider?

2iii. Typical Purchase
Funerals are a local purchase with the majority of customers choosing a funeral director close to them geographically.

This is exactly what I'm counting on.

3. Historical Performance
Within this section we will look at the two main drivers of Dignity’s historical performance:
The expansion strategy that provided a 53% increase in the number of branches (3.9% cagr); and
The pricing strategy that delivered an 81% increase in average prices (5.6% cagr)


Again - pricing over volume.

3i. The Expansion Strategy

Acquisitions actually drive competition on a local level - acquisitions have created numerous well-funded, well-trained and well-motivated competitors

How local? Surely there's a non-compete clause in any acquisitions? I would be interested to know if Dignity has ever acquired this new competition from an acquired competitor before. That'd be a nice little operation for competitors, set up a branch, get bought out, set up a branch, get bought out....

Dignity operates entirely under acquired trading names – sensible historically but increasingly vulnerable to a consumer backlash and also mean there is no customer facing brand

As before I'd like to see single brand, uniform service and based on the look of some stores some better quality store aesthetics. Some of the locations in the report (although they'll be cherry-picked) don't exactly "brighten the mind" when you look at them.

The former is important to understanding why branch productivity has collapsed and thus why prices have had to increase so dramatically.

You can make the same argument that price increases have reduced volume. I'd like to see how the market responds to lower prices.

Major Acquisitions, Process And Rationale
Nothing to address

Major Acquisitions

The reason we draw attention to the locations not purchased is that, at some point, Dignity reaches a saturation level whereby it cannot acquire further locations without either causing competition concerns or risking existing portfolio cannibalisation. Additionally, any owners of funeral businesses in “white-space” for Dignity will likely be aware they can demand a significant premium for purchase. We are not providing on whether Dignity has reached saturation yet, however it is clearly closer to this point now than when it listed in 2004.

Competition concerns - Cant really do much about that.
Cannibalization - If a store can be acquired and it makes economic sense it should be acquired, if not it shouldn't.

Process And Rationale

In terms of the process and terms:

Owners are often contractually obliged to:
Forego use of the previous trading name
Not open a funeral business within a certain distance
Not actively canvass for previous business


This is the non-compete clause I mentioned then. Would be interesting to see how the short thesis leans on the fact that previously acquired operators go on to open to stores in competition but this blows that out the water.

Acquisitions Drive Competition On A Local Basis

Acquiring a business typically has the intrinsic benefit of reducing competition to the acquirer.

However, when we look at Dignity we can see that this is false. Every acquisition that Dignity undertakes creates new competition from two sources:

The business owner who, after a lock-up period, starts a new business
Staff who, post-acquisition, decide that they would rather go it alone rather than become part of Dignity


Presumably this is a little disingenuous then, given that any local business opened won't be within a certain distance, actually limiting the competition as per the contract.
As for staff, if they do want to set up business and they aren't part of the sale contract then yes they could set up competition.  My gut tell s me that the number of staff that go on to do this is relatively low, we'll see if the report says anything.

Although barriers are clearly high to become a national operator at a local level barriers are virtually non-existent.

You can literally set up overnight as a funeral director.

True - but reputation wins the business.

Knowledge and experience are the main barriers to establishing a viable funeral business – this is clearly of no concern to someone who has just sold a business to Dignity or a long-term funeral home employee.

But we already established the non-compete clause and the distance of a competitor for the seller so this is disingenuous. For employees its accurate but really, how many go on to do this?

The effect of local competition can be seen in both Dignity’s market share and branch productivity. This was identified by Management in the H1 2017 trading statement, the Company states:
“The Group continues to keep market share under review, with reductions in the first half of the year slightly worse than anticipated. This could be a function of increasing numbers of competitor locations or more aggressive price competition.”


I'd love data on the competitors that have appeared in the last year. It's stated that it "could" be competition or price. I'd say its price and management is dressing it up.

It has also been reiterated recently by the CEO, Mike McCollum, speaking to The Daily Telegraph:
“The funeral sector is unregulated, so it is very easy to set up a new business,” McCollum told The Daily Telegraph. “We have seen, over many years, the number of funeral directors continue to rise, with more vigorous competition in the sector. It is a very fragmented market, and is fragmenting the whole time. 9”
This quote is telling and, given the strength of the sentiment and the acknowledgment that this has been a multi-year trend, we are extremely surprised that this has not been brought to investors’ attention previously. We will now show where this “vigorous competition” is coming from.


It has to be conceded to some extent that Dignity wouldn't be pushing for regulation if they didn't feel it would limit competition for them. That's ultimately what they want to get out of it I'd say.

Competition From Acquired Owners
S&R Childs Funeral Services
In February 2017, Sandra and Geoffrey Homewood opened a new business trading as Sandra Homewood Funerals (company number 10605301) http://www.homewoodfunerals.co.uk

The new business is located 5 miles away from the closest S&R Childs branch so will likely see some overlap of customers. More importantly for Dignity, the new Homewood business is located just a few hundred metres from a different Dignity business, L Hartness Funeral Directors in the town of Bicester.


5 miles from the closest S&R Childs - I'd assume that's the non-compete clause.
Few hundred metres from a different Dignity business - We'd need more detail around when Dignity acquired this business and the exact Homewood terms to know for sure.
Not saying competition is good but again, there could be some exaggeration around acquisition competitors here.

As an interesting side note, when Dignity purchased S&R Childs it already owned two locations in Oxford.
It appears that both of these names have now been rebranded as S&R Childs Funeral Directors with the two former names falling out of use. We assume this is due to S&R Childs having a stronger local reputation than the replaced names.


So you're saying reputation wins business??

The Hunter Family
No detail given about the compete clause, but worth noting that this is c. 5 miles from the Dignity operator.

James Bradley & Sons
Admittedly this is closer than I'd like but may not be representative of all acquisitions. Does seem a valid concern.

Competition From Acquired Staff
I'd need numbers before i'm too concerned, I don't feel like as many staff set up business compared to the previous operators, but that's gut only, no data.

How Dignity Treats Acquired Trading Names
Historically, the strength of a local trading name has been the single largest source of value driving a purchase. A strong name can provide many years of repeat business with families returning to a trusted name time and time again.

But I'm to be concerned with new competition?

This value is represented in intangible assets, of which Dignity holds £350.4 million on its balance sheet (50% of total assets of £715 million). Of this total, trade names from acquired funeral businesses contributes £134.5 million. A further £155.4 million relates to goodwill from acquired funeral businesses. The remainder primarily comprises goodwill from the acquisition of crematoria.

I discount entirely good will and intangibles in general from any valuation.

The entire premise and rationale for this strategy is simple to ensure that people view the acquired business on exactly the same basis as before.

This is changing my mind about needing a single brand. I'd like some reference to Dignity on signage though.

2ii. A Note On Organic Expansion
Nothing to address.

2iii. So Why Is This A Problem For Dignity?
2iv. How Has Pricing Changed Historically?
Calculating Dignity’s Average Selling Price
4. Current Positioning: Establishing Dignity’s Pricing Premium

We have compared Dignity’s ASP to various measures of average funeral cost to show that the Company now operates at anything between a 28% and 42% pricing premium to market averages.
4ii. Funeral Pricing And Comparability

PRicing has been too high for too long. Prices charged have led to lower volumes as you'd expect.
Yes that funeral pricing sheet is poor. How much of a big deal would that be to fix?

4ii. Dignity At An 83% Premium
There is nothing complicated to understand here. It is simply far more expensive to go to a Dignity funeral director than to find one through Funeralbooker.

And now we know the source of this short report, FuneralBooker. A price comparison website that is hosting this report on its site and wants you to use them and not Dignity. Its almost as if they could have some sort of ulterior motive.

https://beyond.life/blog/terms-of-use/ - is a link to the terms of the blog post presumably made by or paid for by beyond life.

4iv. Can Dignity Justify Its Premium?
4v. Absence Of Brand

But they previously said individual brands are valued.... Also, I would like to see a "part of Dignity" on the signage etc.
The report makes a point that Dignity have low social media engagement by comparison to Co-op. But when you think of the local brand strategy this makes sense. Dignity doesn't come into it. There are things I'd like them to do though, and I'll add that to the conclusion.

4vi. What About The Excellent Service Dignity Provides?
If you have followed Dignity’s reporting for a long time you are probably thinking the following right now, “But, what about the excellent client service that Dignity provides? Surely they would want to leverage this across the entire brand?”
“if these client service and satisfaction levels are correct, why would you not leverage your client’s appreciation by operating as one brand across the UK?”


Well maybe its because as stated in the report the local brand has the reputation.

Take an obvious implication of this. A satisfied customer has used Dignity under the trading name Francis Chappell in South East London for many years.
This customer then moves to West London. Will he be able to pick out T.H. Sanders and W.S. Bond as the Dignity businesses for his next funeral?


Not necessarily no. But you would hope that Dignity would own and run T.H. Sanders and W.S. Bond and if they had the reputation to win the business, which is a factor in Dignity acquisitions, then you would expect them to do so and if they don't they would be on the acquisition radar, competition concerns permitting.

5. The Future: What Is Changing And How Does It Affect Dignity?
5i. Emerging Online Disruptors

Lots of price comparison website self-marketing in this bit.... But lets assume people do use them. They will focus on locality and reputation first. Each operator will want their reputation advertised on the site as a differentiator so thats good, and that will lead to Dignity to potentially be able to charge a premium if they own the longest running and most reputable operator.

5ii. Increasing Media And Government Focus On Funerals

States that funerals are expensive. The free-market is already taking care of this by competitors lowering prices to gain share evidenced by Dignity's need to lower prices.

5iii. Increasing Popularity Of Direct Cremation

States that cremations are lower cost and don't have a service but people can optionally hold a ceremony. Personally, the service is the most important part, cremation or not. I don't see services ending.

Dignity launched its own direct cremation offering, Simplicity Cremations, in December 2016 at a headline price of £1,495 including the cremation fee.
This is far below Dignity’s funeral only ASP of £3,081 and from this Dignity would also have to apportion revenues for its crematoria.


I'd assume lower costs too. Also Dignity owns the most crematoriums, so could take the largest market share.

5iv. Highly Competitive Pre-planning Market
Dignity ended the year with a total of 404,000 plans in place, up from 374,000 at the end of 2015 – this implies that a total of 19,000 plans crystalised during 2016.

Dignity dealt with 70,800 deaths in 2016. This means pre-paid plans represent 26% of business. This proves my personal opinion that most people don't plan, and buy on necessity. This doesn't particularly concern me. Being cold and calculated, I could see how raw, emotional people could be willing to spend more per funeral in their emotional state. You haven't got the time or inclination to "shop around".

6iii. Model

Financial Model assumes market share stays static but prices charged falls, this doesn't stack up to me. However, even if you agree with the model if you apply an earnings multiple of 15x to 2021 earnings, the lowest in the model of £62m, you get a price er share of £18.6.


Conclusion:

End of life services selection is based upon locality and reputation first and price second.
Dignity's strategy has previously been to price high based on reputation. This lowered volumes and presumably costs (less services, less staff, less materials etc.).
This lead market share to stagnate and the short report to claim that productivity fell per store and hinted at it being an ominous sign. Productivity did fall, but the primary reason was the Dignity strategy to prioritise price over volume. This lead to competition being able to win business on lower prices.

What this means for Dignity:

Management will lower prices.
But, volumes and market share should increase.
However, costs should increase.
But, competition could fall if competition loses enough business.

What I''d like to see the business do:
Lower prices.
Be more engaged on social media.
Invest in stores and highlight the Dignity brand. Associate Dignity with the operator at the store level.
Improve marketing materials

Overall, we're in for a profit reset and lower than historical growth, but this still gets me to a higher value than the stock price now. Even if the short report is correct, applying an earnings multiple of 15x still gets you to £18+ a share and 100% upside.
Not Investment Advice. Do Your Own Research.


DRValue

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Re: DTY.L - Dignity Funeral Services
« Reply #11 on: March 13, 2018, 07:57:31 AM »
Pre-lims released tomorrow.
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DRValue

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Re: DTY.L - Dignity Funeral Services
« Reply #12 on: March 14, 2018, 05:48:42 AM »
Pre-lims out. Better than anticipated results. Share Price up 13.89% to £9.71.

Quick takes:

  • Previous Guidance anticipated 20% of sales being lower priced funerals.
  • Current run-rate of only 15% of sales being lower priced.
  • Deaths up 7% on last year. Must've been the cold snap.
  • Pre-arranged funeral plans up from 404k to 450k

Management engaged LEK Consulting to produce pricing and product strategy to strike the right balance between price and service. Also engaging in online investment and efficiency programs for a better customer experience and lower costs.

At the moment it looks like the price versus volume thesis is still intact but less customers are going for the lower priced options which should increase margins and returns.

The real test will be in August when the price reduction data is more well seasoned.

However,

Model updated to included higher than expected maintenance capex of £20m (average of the last 3 years).

Intrinsic value estimate reduced to £16.32 per share.

But this is moddeled in a price war environment. This won't last forever.
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DRValue

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Re: DTY.L - Dignity Funeral Services
« Reply #13 on: March 16, 2018, 03:58:06 AM »
Not Investment Advice. Do Your Own Research.

DRValue

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Re: DTY.L - Dignity Funeral Services
« Reply #14 on: March 21, 2018, 04:32:39 PM »
Montanaro Asset Management Limited small-mid cap investor just increased stake from  4.54% to 5.01%. Adds to their previous addition.

Another Director related acquisition of shares totalling £10k.
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Sharad

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Re: DTY.L - Dignity Funeral Services
« Reply #15 on: March 22, 2018, 09:18:01 AM »
Sharad, can you please elaborate a bit, I was under the impression that ownership of cemeteries was a very profitable activity.

Apologies for not responding sooner. Perhaps I should have kept my two cents in my pocket earlier, as the Keystone deal occurred in 2009/2010, so it's been a long time now. With Keystone (primarily just a funeral homes operator), I appreciated the ROA the company could generate, and I was focused on that. Once cemeteries are added to the equation (when they were bought out), I didn't like the metrics anymore. I don't feel the earnings on the plots justifies the maintenance, regulatory hurdles and additional general expenses to upkeep and secure the lands. The funeral business benefits - pardon the callous terminology - on turnover, while the cemetery business is more like a REIT with small rents on the plot for several generations. I know that the land holds value, but it's hard to realize that over any short period of time, outside the "rents". I prefer the standalone funeral home business for that very reason.

If Dignity or SCI, or another company in the industry carved out the cemetery business into a REIT, I'd probably take a look again.
« Last Edit: March 22, 2018, 09:24:07 AM by Sharad »
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tol1

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Re: DTY.L - Dignity Funeral Services
« Reply #16 on: September 10, 2018, 02:37:07 AM »
Have stayed away from this one so far. Price wars rarely end well in the ST. Any views on Co-op's most recent move?

kab60

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Re: DTY.L - Dignity Funeral Services
« Reply #17 on: September 10, 2018, 03:57:18 AM »
What's the latest move, sorry? I actually spent some time on this a few months back but when they recently decided they wanted to centralize their organization (apparently something figured out by external consultants...) and use a one brand/one pricing strategy (if I recall correctly) I totally lost interest and thought it sounded more like a short than a long. Really not impressed with management and a quick search on Google will mention a couple of failed rollups in the funeral business so I'd prefer good management (and in my book they don't rely on external consultants).

tol1

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Re: DTY.L - Dignity Funeral Services
« Reply #18 on: September 10, 2018, 04:28:43 AM »
They do not have a 1 brand / price strategy. Co op announced further price cuts.

kab60

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Re: DTY.L - Dignity Funeral Services
« Reply #19 on: September 10, 2018, 05:34:08 AM »
Sorry, I wrote that too fast and expressed myself wrongly.

These were the parts the turned me off in their most recent conference call:

-

And so we've ended up with about 130 individual networks around the country very deliberately because we wanted those businesses to run autonomously. Our plan is to go from about 130 service centers to 70 service centers, thereby reducing a significant number of properties from the business.

-

Charles Hall from Peel Hunt. A couple of questions. On the pricing front when you talked about having a lower entry-level price and a more national pricing point, particularly as you go online, how was that going to work in practice given that you've got very different pricing around the country and there's very different competitive sets in different regions? And secondly, on the brands, have I got it right, you're going to keep the prestige brands but move the next tier down to being predominantly Dignity? How are you going to be marketing that online? Are you going to be marketing both the prestige brands and the Dignity brand? Or is it going to be effectively Dignity online and the prestige brands keeping their local position?
--------------------------------------------------------------------------------
 Michael Kinloch McCollum,  Dignity plc - CEO & Executive Director   [2]
--------------------------------------------------------------------------------
  Okay. So on the pricing first. Part of the tests that we've been doing so for have been looking at harmonizing our prices. So we've, in about half of that business, reduced the price of our full-service funeral and made a great deal more consistency around it. We won't be able to go to a complete national pricing overnight because some of our locations just aren't in the right place. But you will see in fairly rapid order, a great deal more consistency to our prices. So large chunks of the network will go to a standardized price and the rest will follow over a period of time, hopefully fairly promptly, but there are limits to what we can do.

---

I'm sorry I expressed myself wrongly. My concern is they're adapting a strategy that removes autonomy from the local branches and centralize functions. It's an initial turnoff for me, because I vastly prefer decentralized operations. Perhaps it might work here if all they centralize is mostly boring back office stuff but either way it seems like a massive mouthful. I'd love to get your perspective, because I basically threw it in the not interested-pile when I read the last CC.