Propel Funeral Partners Ltd (ASX: PFP) is the second largest funeral operator in Australia and just gave the market its trading update for the first quarter of FY19.
It reported that it achieved record revenue of $24 million, which was up approximately 20% on the prior corresponding period. It also achieved record funeral volumes.
The operating earnings before interest, tax, depreciation and amortisation (EBITDA) margin was "above 26%", which was consistent with FY18. Like for like (LFL) average revenue per funeral was up compared to FY18 and it was within the long-term target growth range of between 2% to 4% per annum.
Propel also reported that cash conversion remained strong at around 100% and its observable market share has remained stable.
For the first half of FY19 Propel is facing a strong prior corresponding period (PCP) in 2017 due to a severe flu season last year, this year there is a below trend number of funerals due to a benign flu season in 2018. Assuming this continues, LFL volumes will be down for the first half, however Propel said that historical experience suggests a rebound in funeral volumes in 2019.
Management remain on the lookout for additional acquisitions to add to the ones it has already made during the past year.
The balance sheet is apparently in good shape to fund those acquisitions with a current net cash position of $15 million and a new $50 million senior debt facility.
Propel said that it's still targeting a dividend payout ratio of between 75% to 85%.
Foolish takeaway
Propel is one of my favourite small cap ideas because of the long-term organic and inorganic growth it can achieve. Acquisitions will be a major driver of inorganic growth.
Organic growth will likely be driven by the fact that death volumes are expected to grow by 1.4% per annum between 2016 to 2025 and then increase by 2.2% per annum from 2025 to 2050.
Propel is currently trading at under 20x FY19's estimated earnings with a grossed-up dividend yield of 3.4%. I believe it could be a decent long-term buy at the current price.
