I say this not because previous share prices are of much value (a business that falls 90% is a business that fell 80% and then halved again) but because it demonstrates that this business clearly failed to meet expectations, but has managed to arise some buying interest since its lows.
In fact I only really looked at Dignity as I was recommended it by a PI that I respect and then saw it in a couple of funds that I look at for ideas. Bad news always travels faster than good so the change in people's perception is invariably a slow one. As it moves from the Value investors to the GARP.
Clearly Dignity has been mismanaged (intentionally or otherwise) over a number of years and the new management have very clearly set out their stall as to what went wrong, what they are doing to fix it, and where the business is trying to go and how it can be judged. This is all available on the Dignity website and is under the webinar of the AGM. Before investing, or deciding not to, I would recommend that a PI watches this.
What I think is now true is that;
a)Dignity has a plan
b)Dignity has in the UK genuine scale and to the extent this industry becomes more regulated scale often helps the larger incumbents. This is particularly true of Financial Services regulation which is invariably designed to protect by requiring lots of paperwork designed to stop the last discovered issue with little regard to the next.
c)Dignity has significant Vertical Intergration and skills in manufacturing coffins that it could do better at selling outside its own business. ie competitors need coffins and competitors need crematoria and when a funeral director comes to place an order Dignity has already either won or lost the funeral so there is no benefit in being "Dignity only" at that point.
d)Dignity realises it does not have substantial price setting ability.
e)Management believe there is low hanging fruit.
f)The pain of the transformation is highest near the start.
g)Management feel that a valuation of £1.2bn-£1.6bn can be placed on the crematoria unit if it was self-standing. But an amount of that valuation will need to be sold to generate cash to meet the required funding for the transformation. Much of the fruit may be low hanging but it is not cheap. Whilst giving/selling this value is painful because the management is shareholder focussed the intention is to minimise the shareholder pain.
h)Dignity has a v competent Executive Chairman who has a reputation and money to lose if Dignity does not deliver.
i)The change will not be immediate. Much of the improvement will be lots of small steps. This is likely to be little obvious change in 1 year bringing big changes in 5.
j)Dignity has an amount of property assets. These are at historic cost. Sometimes a very historic cost. Some of these can be disposed of. Others utilised better.
k)Dignity owes a shed load of cash £630m. This will be a millstone around the businesses neck for some time to come. This means that any real recovery in actual operational performance will not be next year. And in all probability I will be able to say that again next year and possibly the year after.
l)There are worms in the numbers still to come out. For instance old management talk about the cashflow, but new management have admitted that non-investment has flattered the cashflow.
m)You cannot avoid the market. You can choose not to go with Dignity but we are all going to die.
n)Currently Phoenix has control of the business and is aligned with other shareholders.
For the Financial Year to 25/12/20 the results for the company ended with a pre-tax loss of £19.6m
The Company claims that to properly understand the business there should be a write back of non-underlying costs of £58.4m.
It should be noted that these are the numbers of the previous management and as an accountant I think they are as clear as mud. I am genuinely unsure whether they are bamboozle to hide the problems in the business or just bamboozle for the sake of being clever.
Regardless I think that there is something like £20-£30m that can be added back in considering where the company is in terms of its current market capitalisation of circa £400m.
Given all of the above I think that Dignity is around breakeven in operation but needs to make circa £25m pa to make its valuation, which seems perfectly viable. Particularly when you recognise that £44m of last year’s losses were imparements of goodwill and trade name. These are entirely proper but there is only so much goodwill to write down.
Given all of the above Dignity is not a traditional “Value” proposition. But I feel I can consider it to be a GARP purchase. I am therefore taking an initial position. With a view to seeing whether management can gain credibility through delivering the low hanging fruit. If this happens I will add. If not I will close the position. This is purely an initial position and not as yet a material investment.
I do note that in the presentation the Current Executive Chairman and founder of Phoenix, the largest shareholder that acted to oust the previous management, was brave enough to give a variety of potential valuations over the next 10 years depending both on their success on implementation and the discount rate to be applied. These range from £19.30 to £176. Clearly it’s a wide range but should also be recognising today’s price of circa £8, as well as its 10 years ahead. Clearly £19.30 next year is a lot better than £19.30 in 2031.
Always DYOR and in the case of Dignity watch the AGM presentation before making an investment.