“’Tis impossible to be sure of any thing but Death and Taxes,” wrote the English playwright Christopher Bullock in 1716. However, the business of making good money out of this universal truth is proving somewhat less sure for crematoria owner and funeral services provider Dignity (LSE: DTY) and e-invoicing firm Tungsten (LSE: TUNG), which reckons its global tax-compliant invoicing network is one of its key differentiators.
Here, I’m looking at whether fallen FTSE 250 angel Dignity could now be the turnaround buy of the year, and whether AIM-listed Tungsten could also be set to fly.
Below expectations
Dignity’s shares, which reached an all-time high of over 2,800p in autumn 2016, fell as much as 8% in early trading today, hitting a new multi-year low of 624p. This came after the company released a first-quarter update with underlying operating profit down 42% on 15% lower underlying revenue — an operating performance “below the Board’s expectations.”
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However, this was primarily the result of a “significantly lower than expected number of deaths” during the period (12% to be precise). Below- or above-trend quarters can occur, but the company reminded us that historical data over the last 20 years indicates the final volume will likely be within 3% of the previous year.
Transformation
Faced with a trend of demand for lower-cost funerals, and a Competition and Markets Authority investigation into the industry, Dignity is in the midst of a transformation plan that includes a margin-sapping, if modestly market-share-gaining, re-pricing strategy.
Clearly with a margin reset, and future profits growth being at a more sustainable (lower) level than in the past (when boosted by regular hefty price rises), Dignity is a less valuable business than it one appeared. Nevertheless, I see this as an attractively defensive business with a credible turnaround strategy.
The shares have recovered some ground since this morning, and are trading at 640p, as I’m writing. I’m looking at 10 times earnings and a 3.8% dividend yield on my expectations for the current year. And I reckon earnings should begin their return to growth next year. As such, I think this former FTSE 250 stock could be a strong turnaround story from this level, and I rate it a ‘buy’.
Fundamental change
You’d have thought a firm whose clients include 74% of FTSE 100 companies and 71% of Fortune 500 companies — and which processed transactions worth over £164bn last year — would be able to turn a profit. Unfortunately, Tungsten never has. Multiple boardroom and strategy changes, since its flotation at 225p a share in 2013, have so far come to naught. The shares are trading at 39p as I’m writing.
The company, having “completely reconstituted our board,” during the last six months, is “undergoing a period of fundamental change in regard to strategy, operations, governance and culture.” A fortnight ago, it announced the initial results of an operating review, and a raft of new initiatives.
I’ve been rather scathing of Tungsten over the years. And given its history of failed promises of profits just round the corner, and analyst forecasts of continuing losses for the foreseeable future, I find it hard to get excited by the latest round of change. Maybe something will come of it this time, but it’s a stock I’m continuing to avoid for the time being.
