Short sell report published on Dignity PLC you hold, UK funeral services provider

19th Sep '17 by JamesFuneralbooker

52 comments 18483 reads

Good morning,

I’m James, co-founder of Funeralbooker, a UK price comparison website for funeral directors.

This morning, we published a comprehensive short sell report on Dignity PLC, a UK-listed funeral services provider. This report is based on what we have learnt in the past 3-years building a business where people can quickly find funeral prices online across the country.

As a promoter of price transparency, we are a direct threat to Dignity’s incumbent position as a high-priced funeral chain. Fundamentally, we think Dignity will not be able to maintain expected pricing levels going forward and as such is overvalued.

We have researched and written a conviction report and have an open short position on Dignity: https://funeralbooker.com/blog...

I have included the summary of our argument below and you can read the full report here: https://funeralbooker.com/blog...

Kind regards,

James Dunn

SHORT THESIS SUMMARY

We believe that Dignity is currently valued based upon a view that EPS will continue to grow through a predictable increase in revenue and profits. We do not believe that this will be the case going forward and set out our argument as follows.

Between 2005 and 2016 (“the historical period”) the Company delivered:

Revenue growth from £143 to £314 million (7.4% cagr)
Operating profit growth from £42 to £98 million (8.1% cagr)
EPS growth from 22.4p to 119.8p (16.5% cagr)

There have been two drivers of this historical performance:

a 53% increase in the number of branches (3.9% cagr); and
an 81% increase in pricing (5.6% cagr)

The former is well publicised and reported on by Management. The latter, however, is not discussed publicly or reported on in annual reports. There are no KPIs reported relating to pricing. To fully understand historical performance, and form a view on future prospects, it is necessary to analyse how both branch expansion and pricing have played their respective parts in Dignity’s growth story.

Our view on the historical contributions of these two drivers is that:

Branch expansion has functioned to keep the number of funerals performed steady, offsetting a +30% collapse in branch productivity
- Dignity’s market share has been static at c.12% between 2005-16
- Branch productivity (funerals performed per location) has collapsed by more than 30% from 129/year in 2005 to 87/year at H1 2017
- Newly acquired locations typically provide around 150 funerals per year initially, offsetting customer losses elsewhere in the…

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northernblue

6th Jan '18

Agree with Wildshot regarding links, sorry that should have been a thumbs up!

VegPatch

19th Jan '18

Dignity: 2018 profit warning. Cutting price of simple funerals by 25% to remain competitive. Market also over supplied. 2018 results will be substantially below market expectations. . 2018 EPS was 135p. Won't go well today..

To be fair to James from FuneralBroker he has consistently pointed out Dignit's premium pricing and increasingly competitive environment. You may not have appreciated his motives for the report (publicity for FuneralBroker's nascent business) but the article is well reasoned and contains good analysis, he has stimulated debate, especially amongst those holders like wildshot and has been proved right.

Jeremy Rea

SP down 50% as it stands. Ouch.

I don't hold. Thankfully.

Andrew L

Well played to James and Funeralbookers!!!! A lot of "quality investors" seemed to love Dignity but there was never much of a moat. The premium pricing strategy was always going to crash at some point. Interesting that Dignity management sold shares I believe so even they didn't believe the plan. Amazed that institutional investors couldn't see the risks here. People get blindsided after say 10 years of growth into thinking that this company is somehow immune to the law of gravity. Not a fan of Dignity and how it treats consumers in terms of just jacking up prices i.e. betting that consumers will remain loyal to their existing funeral provider

timarr

i.e. betting that consumers will remain loyal to their existing funeral provider

I know what you mean, but still, that may be the funniest thing I read all month, LOL.

Profit warnings are never fun (i have had my fair share)
But this company is a gold mine for puns
A bit of a pity as its been buried today, the shares have gone down in flames and the strategy is in ashes

I could go on but it would be the death of me

apologies !

Ramridge

I wish you well, James, but I cannot find anything more depressing than having to sit down once a year, go on a price comparison website to see if my funeral plan is still the best for me (or for my surviving relatives), or consider switching.
If this day arrives, I would consider the quality of my life has dropped to zero.

matylda

Gotta agree - That's hilarious.

Thanks!!! I guess what I meant is that families tend to have a relationship with their funeral provider. I.e. there is a strong local brand and with service so important people tend to stick with them.

Quality - interesting that Stockopedia's quality ranking was fairly high here at 82. That surprises me but I will have to look into how it is calculated. The key point, though, is that financial statistics reflect the past and not future risks. Even if Dignity has earned a good return on capital in the past and a high profit margin that is no guarantee it will continue to do so. I think Dignity's quality ranking should have been lower given the high debt that has been discussed here. Surely this makes a business lower quality??

To be fair Stockopedia's other metrics would have picked up the issues i.e. momentum and valuation. These are low at 32 and 30 respectively. The shares were potentially overvalued before today's share price crash. I think investors had just become complacent???

cig

The whole business model seems to have been to use financial engineering to construct accounts that looked good to quality investors (and momentum, while it lasted). Given they were not doing outright fraud, it did show up in leverage but other metrics were fantastic so any scoring system that builds average of multiple factors is going to miss such situations. And the excess leverage could be sold easily by claiming the sector is unusually sedate.

Here it is not a question of financial statistics only reflecting the past, it's a case where they manipulated the accounts to make the business look better than it really was compared to the base case of fair accounting and sustainable business practices.

There is one ratio that the Naked Trader is pretty strict about. He never considers a share whose Net Debt/ Operating Profit ratio is greater than 3.5
In the case of Dignity, the last 2 FY accounts show ratios 5.5 (FY 2016) and 5.4 (FY 2015) .
There is little room for financial creativity here. This ratio is high enough to stop dead (no pun intended) in your analysis and move on elsewhere.

JohnEustace

The Naked Trader has made good profits in Dignity over the years.
Looking on his website he sold his last remaining position on 1st September last year, a couple of weeks before the report here. He does have good timing.

It’s still a good rule though, we should do as he says even if he doesn’t always follow the rule himself.

John - yes you are right, although when you examine his DTY trades in detail you will find a few of them were spread shorts.

JamesFuneralbooker

1st Feb '18

Hi Wildshot,

Thanks for the appreciation of the report.

Regarding the weblinks, it is typical for forum/blog platforms to "no follow" any links placed by posters. I can see this is what stockopedia have done here (right click on link then choose Inspect). They do this to remove any incentive for people to spam and get SEO boost as google does not treat it as a full authority link.

I'm clearly not a moderator on the site but that is my understanding of how it works anyway.

However, you are correct that we DO of course benefit from people clicking the links, visiting our website, coverage in press etc. That was certainly a motive for producing the report but I would disagree that it counts as underhand. If we produce extensive, accurate and well-researched reports then stockopedia readers should be able to access them easily. Clicking the link is the easiest way.

Cheers, James

Thanks to everyone who took the time to read the report both before and after the share fall. I hope people were able to make/save money here.

Agree on the comments regarding suitable posting platforms for people who want to clearly declare an interest. We clearly had an interest and wanted to make this as clear as possible. Any way to produce reports such as these in as transparent and trusted a manner as possible is hopefully in everyone's benefit.

Cheers, James - Beyond (formerly Funeralbooker)

showd

2nd Feb '18

Dignity looks like good value now though - it looks as if hedge funds are piling in!

gus 1065

18th Apr '18

Today's trading update is a strange beast. Almost apologetic that they "missed" their profit warning and that the business mix is better than expected (leading to better than expected earnings figures). Either way, shares were up 11% on the day.

https://www.investegate.co.uk/dignity-plc--dty-/rns/trading-update-for-the-first-quarter-2018/201804180700032421L/

All well and good to manage expectations but the downbeat commentary seems perverse. Maybe something to do with the nature of the industry? Or is it just a dead cat bounce (coat please)?

Gus.

Scoobydoit

Ramridge, NT makes exceptions for companies supported by large tangible fixed assets and Dignity (LON:DTY) has plenty of those - £248M at Year End

Gus, I share your view and the fact that it didn't hold on to it's early gains (up 20%) surprises me. Some chunky trades report after hours but no idea on the bearing this will take tomorrow (more concern for my spread bet) short to medium term this has to claw back some of the lost ground. Since the announcement it's been trading between 750 and 1000p so I'm hoping we can sustain this break out.

£37.5M EBIT in Q1 is significant, the company is currently valued at £518M (at 1037p) that's x14 even if they don't earn a penny more all year. I can't find any broker updates on Research Tree.

daveinthelakes

Please remember that with the exception of James Bond, You Only Live Once!

The increased death rate due to the exceptionally cold and long winter will equalise out over the next year or so as most of those that have left us would in any event have sadly departed over the coming months/year.

Short sell report published on Dignity PLC you hold, UK funeral services provider

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JamesFuneralbooker

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