The shares of InvoCare Limited (ASX: IVC) took a dive in morning trade and sat 4% lower despite the release of half year results that saw net profit after tax jump by a massive 50.6% to $27.8 million.
Although this was undoubtedly a strong result, it is worth noting that the bottom line did receive a boost from one-time gains on undelivered prepaid contracts after tax and asset sales after tax. If you exclude these gains then operating earnings after tax grew 13.2% to $21.5 million, or 19.7 cents per share.
As sales only grew 3.1% year on year to $214.5 million, many will no doubt find it hard to justify paying around 28x trailing operating earnings for its shares. But as the largest private funeral, cemetery, and crematorium operator in the Asia Pacific it is in a strong position to grow at a steady rate for a long time to come which I think warrants the higher valuation.
The reason sales growth slowed during the period was largely due to a 1.6% drop in the number of Australian funeral services performed. Management believes this was the result of a reduction in the numbers of deaths during the period and expects things to pick up in the second half.
Although funeral services were down, prepaid funeral contracts increased by 7% year on year. This helped bring the total prepaid contracts to a massive $438 million, which is a very healthy cash balance the company has to invest or use for acquisitions.
Through its 250 locations the owner and operator of the White Lady Funerals and Simplicity Funerals brands commands an estimated 34% share of the Australian market. But management isn't content with that. Moving forward it is focusing on improving operational efficiencies, driving increased market share, and optimising the overall business alongside its product offerings to yield better returns on invested capital.
InvoCare declared a flat interim fully franked 17 cents per share dividend. If it maintains its final dividend as well then investors will be looking at a fully franked 2.8% dividend for the full year. Whilst this isn't the biggest yield on the market, it's still an attractive one that has room for long-term growth in my view.
Whilst InvoCare may not be as widely known as sector peers G8 Education Ltd (ASX: GEM) and Greencross Limited (ASX: GXL), I feel it could be an even better long-term investment option than them.
