Future Demographics And Acquisitions Will Expand Australia's Funeral Service Market

Key Takeaways

• Favorable demographic trends in Australia and New Zealand are expected to drive increased funeral demand and revenue growth.
  
• Acquisition-led strategy and strong cash flow support market expansion, operational improvements, and long-term earnings enhancement.
  
• Leadership changes and strategic uncertainties could impact earnings growth, while acquisition execution risks and fluctuating revenues challenge profitability and revenue predictability.

Catalysts

Provides death care services in Australia and New Zealand.

• Propel expects to benefit from favorable demographic tailwinds in Australia and New Zealand, leading to increased death volumes which are forecasted to grow significantly. This is likely to bolster revenue growth as funeral service demand increases over time.
  
• The company is pursuing an acquisition-led growth strategy, with a healthy funding position of $144 million to support further acquisitions. This strategy can increase market share and scale, potentially enhancing revenues and earnings.
  
• Recently completed and announced acquisitions, despite some having lower average revenues per funeral, present opportunities for operational improvement and pricing adjustments that align with the rest of the network, potentially increasing margins over time.
  
• Propel's consistent track record of maintaining high cash flow conversion rates facilitates reinvestment into growth initiatives and capital management strategies, potentially enhancing long-term earnings and shareholder returns.
  
• The company holds significant property assets valued at over $240 million, providing a strong balance sheet to support ongoing operations and future expansion projects, which could positively impact earnings stability and growth.

Propel Funeral Partners Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Propel Funeral Partners's revenue will grow by 6.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 9.6% today to 11.0% in 3 years time.
• Analysts expect earnings to reach A$29.2 million (and earnings per share of A$0.2) by about March 2028, up from A$21.3 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 35.6x on those 2028 earnings, up from 33.5x today. This future PE is greater than the current PE for the AU Consumer Services industry at 15.3x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.03%, as per the Simply Wall St company report.

Propel Funeral Partners Future Earnings Per Share Growth

Risks

• The retirement of Managing Director Albin Kurti could introduce uncertainty and instability, which might impact future leadership effectiveness and strategic direction, thereby affecting long-term earnings growth.
  
• Changes to executive remuneration may have influenced operating costs, leading to a decrease in operating EBITDA margin, potentially impacting net margins and future profitability.
  
• Fluctuations in organic funeral volumes, due to factors like the post-COVID environment's impact, introduce variability in revenue growth and may create challenges in accurately forecasting revenues.
  
• Increasing acquisition activity, while expanding market presence, also involves execution risks and integration challenges that could affect profitability if anticipated synergies are not realized, potentially impacting net margins and earnings.
  
• While favorable demographics are expected to drive growth, non-linear death volume fluctuations or unfavorable economic conditions could lead to revenue volatility, impacting the predictability of future revenues and earnings.

Valuation

• The analysts have a consensus price target of A$6.183 for Propel Funeral Partners based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be A$265.8 million, earnings will come to A$29.2 million, and it would be trading on a PE ratio of 35.6x, assuming you use a discount rate of 7.0%.
• Given the current share price of A$5.18, the analyst price target of A$6.18 is 16.2% higher.
• 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.