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Equity Bottom-Up

<div class="content-highlight"><p style="text-align: center;">New competitors are unlikely to breach the firm's wide economic moat</p></div><hr><p style="text-align: left;">Shares in funeral services provider <a href="https://www.smartkarma.com/entities/9044" target="_blank" data-smartkarma-citation="entities:9044:1">Invocare Ltd (IVC AU)</a> have been punished during the past six months. We believe the market's myopic concerns are misplaced, offering an opportunity to invest in this attractively priced wide-moat company. Invocare's moat is sourced from a combination of scale and intangible brand assets, which insulate it from competitors such as recently listed Propel Funeral Partners, while preventing similar challenges to those recently faced by Dignity in the United Kingdom. Management is investing heavily, refurbishing funeral homes, cutting costs, and bringing IT systems up to speed, all of which will further strengthen its already dominant position. We are attracted to the resilience of the industry, and an ageing population drives an acceleration in demand for at least the next two decades. In addition to concerns about an uptick in competition, we believe the market also underappreciates the value of the prepaid funeral business, which provides a low-cost source of funding.</p><hr><h2>Key Takeaways </h2><ul>
<li>The domestic funeral market is sufficiently fragmented for both Invocare and newly listed Propel Funeral Partners to continue gaining share for the foreseeable future without stepping on each other's toes. We estimate both firms will account for 60% of the domestic market by fiscal 2022, but Invocare will maintain its superior position, given its leading scale, market segmentation, and brand strength. </li>
<li>While the market is concerned Invocare may cede market share or experience pricing pressure, as has been in the case with Dignity in the U.K., we believe this is an unlikely scenario, given fundamental differences between the two businesses, accordingly the multiple de-rating is misplaced. </li>
<li>The prepaid funeral business is attractive, as the funds are invested in a diversified portfolio and over the long term should comfortably outperform inflation, with the benefit retained by the company. </li>
<li>We believe the market's fears have created an opportunity to invest in a high-quality stock at a discount. We raise our fair value estimate by AUD 1.50 to AUD 17.00 per share to reflect the increasingly valuable prepaid funeral business and more bullish market share assumptions.</li>
<li>We project high-single-digit EPS growth for the next five years. Invocare is amid an unpreceded reinvestment program, which should facilitate market share gains and a continuation of 3%-4% price increases per year, supporting revenue growth of around 7% per year. We forecast almost 150 basis points of EBITDA margin expansion to 28% by fiscal 2022, reflecting increased scale and cost cuts.   </li>
</ul><p><em>Analyst: Daniel Ragonese</em></p>

New competitors are unlikely to breach the firm's wide economic moatShares in funeral services provider Invocare Ltd (IVC AU) have been punished during the past six months. We believe the market's myopic concerns are misplaced, offering an opportunity to invest in this attractively priced wide-moat company. Invocare's moat is sourced from a combination of scale and intangible brand assets, which insulate it from competitors such as recently listed Propel Funeral Partners, while preventing similar challenges to those recently faced by Dignity in the United Kingdom. Management is investing heavily, refurbishing funeral homes, cutting costs, and bringing IT systems up to speed, all of which will further strengthen its already dominant position. We are attracted to the resilience of the industry, and an ageing population drives an acceleration in demand for at least the next two decades. In addition to concerns about an uptick in competition, we believe the market also underappreciates the value of the prepaid funeral business, which provides a low-cost source of funding.Key Takeaways 
The domestic funeral market is sufficiently fragmented for both Invocare and newly listed Propel Funeral Partners to continue gaining share for the foreseeable future without stepping on each other's toes. We estimate both firms will account for 60% of the domestic market by fiscal 2022, but Invocare will maintain its superior position, given its leading scale, market segmentation, and brand strength. 
While the market is concerned Invocare may cede market share or experience pricing pressure, as has been in the case with Dignity in the U.K., we believe this is an unlikely scenario, given fundamental differences between the two businesses, accordingly the multiple de-rating is misplaced. 
The prepaid funeral business is attractive, as the funds are invested in a diversified portfolio and over the long term should comfortably outperform inflation, with the benefit retained by the company. 
We believe the market's fears have created an opportunity to invest in a high-quality stock at a discount. We raise our fair value estimate by AUD 1.50 to AUD 17.00 per share to reflect the increasingly valuable prepaid funeral business and more bullish market share assumptions.
We project high-single-digit EPS growth for the next five years. Invocare is amid an unpreceded reinvestment program, which should facilitate market share gains and a continuation of 3%-4% price increases per year, supporting revenue growth of around 7% per year. We forecast almost 150 basis points of EBITDA margin expansion to 28% by fiscal 2022, reflecting increased scale and cost cuts.   
Analyst: Daniel Ragonese

Major Reinvestment Program Gives Invocare New Lease on Life