A third trading update in less than two months was issued by Dignity yesterday (Alex Ralph writes). Investors gathering in Birmingham for the annual shareholder meeting would have been relieved to find there were no fresh revelations after a series of alarming updates over the winter. The recent spate of trading updates have gone some way to steadying frayed nerves after a double whammy of profit warnings in November and January, which by February had sent shares to their lowest in nine years.
Dignity is one of Britain’s biggest funeral providers, alongside the
Co-op; they have 28 per cent of the market between them. It conducted 68,800 funerals last year across its 826 locations trading under local family names.
Its dominance, built up through buying up funeral directors, has been challenged by a price war unleashed by concerns among campaigners, politicians and start-ups about rip-off funeral costs in the industry.
In its update yesterday Dignity said that trading since its first quarter results three weeks ago had “remained strong” and held its outlook for the year. The steady-as-she-goes statement left shares broadly flat, down 5p at £10.82.
The outlook had already been lowered sharply in January when Dignity dramatically responded to competitive pressures by slashing its prices. It warned then that profits for 2018 were likely to be “substantially lower” than 2017 when it made a pre-tax profit of £71.2 million.
The forecast was a result of Dignity immediately moving to slash the price of its “simple funeral” by about 25 per cent and freezing the cost of its more expensive “traditional funeral” in most UK locations. Dignity had expected that the lower prices would mean more customers opting for its simple funerals and estimated they could represent as much as a fifth of all the funerals it performs this year. Such a doomsday scenario has yet to play out. What Dignity refers to as the “run rate” was 15 per cent in its first quarter, a lower proportion of simple funerals than the 20 per cent figure it had initially forecast in January.
Trading had also been cushioned by a rise of about 8 per cent in the number of deaths to 181,000 during the quarter compared with the same three months a year earlier.
Despite the relative optimism, Dignity and investors remain exposed to significant risks. It is testing a number of pricing options this year and has drafted in consultants from LEK. It means there is a good deal of uncertainty about Dignity’s business model.
The funeral market is also in the midst of significant and overdue change. Rising scrutiny from parliament and price comparison websites is encouraging bereaved families to shop around.
The market could come under further change at the instigation of regulators. The Treasury is examining the pre-paid funeral market and the Competition and Markets Authority is studying whether the information provided on pricing and services is clear enough to the public. The reviews have come after concerns about the average cost of a funeral rising to almost £3,800 last year, excluding the £2,000 cost for extras, such as flowers and catering, and following reports of aggressive selling of pre-paid funerals.
Dignity has welcomed regulatory intervention as the industry is currently lightly regulated, which means a low barrier to entry for competitors. But as Peel Hunt has pointed out, greater visibility on pricing, which may be recommended by the CMA when it reports back in six months, is likely to be “unhelpful for Dignity given its current premium pricing”.
Advice Hold
Why Shares have already re-rated and management is taking action to combat price competition.
Sound Energy
“Delivering dreams in the desert.” That’s the bold claim made by Sound Energy, the Morocco-focused gas explorer, about its operations in Tendrara in the east of the country (Emily Gosden writes).
James Parsons, the former Shell executive who runs Sound, believes that the geology could be similarly gas-rich to that over the border in Algeria.
Sound drilled wells in 2016 that led to estimates of 0.6 trillion cubic feet in the ground, of which 377 billion cubic feet is thought be recoverable. Shares in the Aim-listed company, which are primarily held by retail investors, jumped by 9.6 per cent yesterday after it announced that it had struck a heads-of-terms deal that could lead to the development of this resource.
To get the gas to market, it will need a new 120km pipeline to link in with Morocco’s infrastructure. Yesterday’s agreement will result in a consortium of partner companies working on the design. They would build, own and operate the pipe, with Sound leasing it back. This is encouraging, though there is still a long way to go; the consortium would also be responsible for the small matter of securing $184 million to fund it.
Developing the existing discovery is not the dream Sound is selling, however. The real vision is to strike a lot more gas in a forthcoming three-well drilling programme. Mr Parsons believes there could be up to 31 trillion cubic feet of gas in the ground (that’s about ten times the UK’s annual demand) and is confident that existing drilling results point to a high chance of success.
So confident, in fact, that the proposed pipeline is 20 inches wide, with capacity to carry the gas that is yet to be discovered. Retail investors are confident too: the shares closed at 44¾p yesterday, compared with the 25p per share that analysts at RBC assign as the company’s “tangible” net asset value from its existing discovery.
If Sound delivers on its dreams, the shares could soar, making it an exciting prospect for those wishing for a speculative punt. If they come up dry, however, the dream could yet prove to be a mirage.
Advice Hold
Why Price already assumes some drilling success; shares could go either way.
