Dignity plc (lon:dty)
Dignity – Management Telling It As It Is?

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Dignity plc Share Price
Grade:The Orange Grade - Shares That I Think Show Promise With A Few Caveats.
Title: Dignity – Management Telling It As It Is?
Company: DTY - Dignity plc
Share Price Then: 920p
Author: Ian Smith
Date: Thu 01 Feb 2018
Comments: Dignity are a national provider of funeral and associated services and for the last few trading updates the management has been highlighting that customers are becoming more price conscious.

The big worry for me is that the more I look at the model, buy a local funneral director, operate as if nothing has changed and phase out the old owners the more I see questions about the number of funerals performed by each branch post acquisation.

It also seems that non-complete clauses are ineffective and many owners are simply starting up new businesses a few years later away from their original location but possbily re-acquiring some customers from their old now Diginity owned business.

Although all funeral businesses operate in a market where price is very important as often the expense is unexpected the customer is reluctant to complain openly to friends and relatives as it would be unseemly.

I suspect that this lack of open complaint and the reality being that most people only purchase one or two funerals in their life time has meant that the actual competition is far less than you might expect as first glance.

It is easy to see how this has lead to a market where the incumbent’s have become complacent, you have probably seen the TV ads for insurance/assurance policies aimed at covering the cost of funerals which talk of funeral costs in the £3 thousand to £5 thousand range.

In 2017
60% of Dignities funerals were full services averaging £3.8K,
27% of Dignities funerals were prearranged services averaging £1.6K,
7% of Dignities funerals were simple services averaging £2.7K,

The share price dropped on the news that Dignity are reducing the simple service to £2k and were predicting that this would replace about 13% of the full service funerals as well.

As well as the big price reduction they recently introduced the web based site Simply Cremations which is a provider of the cremations with the least possible formality, priced at around £1K plus it does seem that the company is not blind to what is going on in the market.

This does not mean that will be able to respond effectively, it may be that there is a conflict between a 1,000 branch business with managers motivated to upsell and the requirements of a funneral director's customers.

For me it as also worth noting that whilst independents may have a lower cost base a big player may have the ability to become the household name that you just go to along with the credibility to establish relationships with the Life Assurance providers; If you have policy type xyz we will organise the whole funeral and you will never see the bill.

Whilst debt appears to be high at around £580 million it is all fixed term loan notes at apprently resonable interest rates. Roughly a halving of profits would start to cause issues with the payment of dividends and agreed EBIDTA levels. Ratio must be above 1.8 for dividends and 1.5 for the debt.

I don't believe that people will buy funerals based on the cheapest price on a web comparison site, but being the highest price is likely to raise questions in the consumers mind.

So you have to ask; Is it time to end the illusion and brand all branches as Dignity and at 820p has it been oversold or has the market woken up?
Read Count: 216/1037

Buy/No Buy In A Nutshell
NegativesA big group that seems to be struggling with their costs in a market where many of its competitors are small owner operators. Seem to need big profits from ancillaries such as flowers and car to be profitable.
PositivesFCA regulation planned for pre-paid funeral plans which may hinder their smaller competitors.
Initial Review Price467p
Last Review Price520p
Last Review Date02-Sep-2020
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