Favorable Demographics And Acquisitions Will Drive Future Opportunities In Australia's Funeral Services

Key Takeaways

• Propel Funeral Partners' acquisition strategy and demographic trends support consistent revenue and operating scale growth.
  
• Strong capital position and cash flow conversion enhance profitability, shareholder returns, and acquisition opportunities.
  
• The funeral services industry faces potential challenges from lower death volumes, higher interest rates, acquisition integration issues, and increased competition impacting margins and revenue growth.

Catalysts

Provides death care services in Australia and New Zealand.

• Propel Funeral Partners is well-positioned to benefit from favorable demographic trends in Australia and New Zealand, such as an increase in death volumes due to aging populations, which is expected to lead to consistent future revenue growth.
  
• The company is expanding its footprint through acquisitions, having spent $100 million on 12 acquisitions in FY '24, which significantly broadened its operational network. This acquisition strategy is expected to enhance revenue and operating scale.
  
• Propel's focus on expanding average revenue per funeral and its proven track record of maintaining pricing strategies in line with inflation could lead to improved net margins.
  
• With a strong capital position and expanded debt facilities, Propel is poised to capitalize on further acquisition opportunities in the fragmented funeral services sector, likely driving earnings growth.
  
• The company maintains a robust cash flow conversion rate of 99%, which supports potential profitability improvements and dividend payouts, signaling a strong capacity for shareholder returns in the future.

Propel Funeral Partners Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Propel Funeral Partners's revenue will grow by 8.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 8.5% today to 11.7% in 3 years time.
• Analysts expect earnings to reach A$31.2 million (and earnings per share of A$0.21) by about February 2028, up from A$17.8 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 41.9x on those 2028 earnings, down from 45.5x today. This future PE is greater than the current PE for the AU Consumer Services industry at 18.8x.
• Analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.54%, as per the Simply Wall St company report.

Propel Funeral Partners Future Earnings Per Share Growth

Risks

• The contraction in industry death volumes, although expected to be temporary, could negatively impact revenue and earnings if the decline continues longer than anticipated.
  
• Higher interest rates have increased net interest expenses, potentially affecting net margins and earnings if rates remain elevated or rise further.
  
• Recent acquisitions have generally lower margins, which may drag down overall gross margins and operating profits as the company integrates these businesses.
  
• The business depends on consolidating a fragmented market through acquisitions, and any slowdown in acquisition opportunities or unsuccessful integration could impact future revenue growth and profitability.
  
• Increased competition within the fragmented funeral services industry could pressure pricing and margins, impacting revenue growth and profitability over time.

Valuation

• The analysts have a consensus price target of A$6.41 for Propel Funeral Partners based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of A$7.0, and the most bearish reporting a price target of just A$5.76.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be A$267.5 million, earnings will come to A$31.2 million, and it would be trading on a PE ratio of 41.9x, assuming you use a discount rate of 6.5%.
  
• Given the current share price of A$5.87, the analyst price target of A$6.41 is 8.4% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.