Dignity shares can stage phoenix-like recovery

The company has lost three-quarters of its value over two years and a competition probe has killed off a recovery, but some remain optimistic. Graeme Evans explains why.

Nursing a share price slump of 50% in 2018 and with uncertainty set to continue due to a regulatory probe, any hopes among investors that Dignity will return to being the steady and predictable performer of old seem as far off as ever.

Broker Peel Hunt highlighted this today by switching its recommendation from 'hold' to 'sell', warning that the Competition and Markets Authority (CMA) inquiry into the funeralcare sector presented even greater risks on Dignity pricing. The shares dived 17% on the news.

It's a fresh blow on top of the fierce competition that has already prompted Dignity to rip up pricing structures and downgrade profit forecasts for this year.

Not so long ago, shares in Sutton Coldfield-based Dignity were lauded as a safe and reliable bet, with movements in the UK's death rate or the pace of funeral home acquisitions the most likely factors driving the share price.

But all that changed at the start of this year when Dignity shares posted the biggest losses of any FTSE All-Share stock during January due to its warning of substantially lower profits in 2018. This was blamed on having to cut the price of its "simple" funerals by an average of 25% in order to address competition.

By subsequently resetting its pricing structure, Dignity had hoped that it would be able to create a platform to "allow many years of stable growth". But the competition has remained just as fierce, with Dignity's biggest rival Co-op recently extending a price guarantee to all funeral plans and probate fees.

On top of this, the CMA now wants to look in more detail at why the cost of funeral director and crematoria services have risen so much in the past decade.

The regulator pointed out that people generally spend between £3,000 and £5,000 organising a funeral, with the price of essential elements up by more than two-thirds in 10 years.

But analysts at Panmure Gordon point out that the study is "somewhat backward looking", given that there have been profound structural changes in the market in recent months. 

Source: TradingView (*) Past performance is not a guide to future performance

They added:

"We believe investors ought to focus instead on the group's revised pricing mechanisms, the upshot being that weighted average pricing has reduced markedly versus FY17."

The broker retains a target price of 1,410p, with its forecasts unchanged despite today's developments.

Dignity, which has been working with the CMA since the market study was announced in June, believes an inquiry could also have benefits in the long run if it means a drive to improve standards and protect consumers.

The company said:

"UK consumers assume all funeral directors are the same, that their market is regulated and each of them is operating to a consistent set of professional standards, when in fact none of these statements are true."

Dignity wants to see regulations setting out minimum standards for core activities such as the care of the deceased, minimum standards of facilities and also operating procedures in crematoria.

Dignity's most recent trading update earlier this month showed trading has been in line with expectations, with a market share of 11.4% for the first 39 weeks of the year slightly higher on a comparable basis with a year earlier. However, changes in pricing structures meant operating profits were 14% lower at £68.6 million.

*Horizontal lines on charts represent levels of previous technical support and resistance.