Invocare. Well-positioned. Earnings and target price revision. Price catalyst. Catalyst: FY12 results. Action and recommendation

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1 AUSTRALIA IVC AU Close Price* 19 Jan 12 Outperform A$7.54 Volatility index Low 12-month target A$ month TSR % Valuation A$ DCF GICS sector Consumer Services Market cap A$m 83 3-day avg turnover A$m 1.2 Number shares on issue m 11. Investment fundamentals Year end 31 Dec 21A 211E 212E 213E Revenue m EBIT m Reported profit m Adjusted profit m Gross cashflow m CFPS CFPS growth % PGCFPS x PGCFPS rel x EPS adj EPS adj growth % PER adj x PER rel x Total DPS Total div yield % Franking % ROA % ROE % EV/EBITDA x Net debt/equity % P/BV x IVC AU vs Small Ordinaries, & rec history Note: Recommendation timeline - if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period. Source: FactSet, Macquarie Research, January 212 (all figures in AUD unless noted) Analyst(s) 2 January 212 Macquarie Securities (Australia) Limited Well-positioned Event We review the outlook for, in particular more closely examining the group s three key drivers of revenue growth. Impact Since listing at the end of 23, has delivered 7% compound revenue growth, which has translated into 1% compound growth in EPS. The three most significant contributors to revenue growth over that period have been price increases, acquisitions and industry volume growth. IVC has demonstrated the ability to increase prices at ~3 4% per annum irrespective of economic conditions. Pricing is well down the list of the reasons people choose a funeral service provider. We view the ability to continue to increase prices at least in line with inflation as sustainable. The acquisitions undertaken through FY3 FY1 were typically small bolt-ons. Bledisloe in June 211 was the first major acquisition undertaken. We estimate the bolt-on acquisitions have contributed ~2% to growth with underlying organic revenue and earnings growth rates strong at ~5% and 8% respectively. There has been a circa 1% increase in the average number of deaths in Australia in the last 1 years. ABS modelling predicts acceleration in the death rate from 212. As market leader, is extremely well positioned to benefit from this increase in industry growth rates. In absolute dollar terms, we estimate NPAT has increased by ~$12m from FY4 to FY1 before impact of acquisitions. Over that period, the number of deaths in Australia has increased by ~11,1 to ~143,5 per annum. Based on ABS projections, the next 11,1 increase in deaths will occur in ~4.5 years rather than 6. Assuming IVC generates the same incremental profit from the same 11,1 increase in number of deaths, this would maintain organic growth rates for the group at ~7% off the higher earnings base. IVC will report FY11 results on 21 February. Our forecast of $38.6m adjusted NPAT up 13% is unchanged. Key focus in the result will be commentary on the initial six months contribution from Bledisloe. Earnings and target price revision No material change to earnings. PT rolled forward to $8.3. Price catalyst 12-month price target: A$8.3 based on a DCF methodology. Catalyst: FY12 results. Action and recommendation IVC has strongly outperformed through this period of earnings uncertainty and risk aversion. While its current one-year forward PE is broadly in line with its long-term average, it is once again trading at a significant premium to the market multiple and it is looking relatively fully valued in the near term. Retain Outperform on a longer-term view. Please refer to the important disclosures and analyst certification on inside back cover of this document, or on our website

2 Analysis has delivered strong double-digit profit and EPS growth since listing at the end of 23. 7% revenue growth has translated into 1% EPS growth. Fig 1 Consistent revenue growth Fig 2 translated into strong EPS growth $m % compound growth FY4(a) FY5(a) FY6(a) FY7(a) FY8(a) FY9(a) FY1(a) c/share EPS 1% compound growth FY4(a) FY5(a) FY6(a) FY7(a) FY8(a) FY9(a) FY1(a) Source: Company data, Macquarie Research, January 212 Source: Company data, Macquarie Research, January 212 has five clear drivers of growth. These are: Favourable demographics. Average 1% annual increase in number of deaths in Australia in last decade. Pricing: Demonstrated ability to increase prices at ~3 4% per annum irrespective of economic conditions Market share growth: This includes both LFL growth as well as 35 new locations opened in the last 5 years Pre-paid funerals: In addition to locking in future market share the pre-need business provides revenue and margin expansion as long as investment returns over the contract life (average years) exceed cost increases to perform the service Business acquisitions. FY5-FY1 acquisitions were typically bolt-ons. The chart below breaks down the contribution of the five drivers to the group s revenue growth. 2 January 212 2

3 Fig 3 Historical Revenue Growth Contributors $ millions Historical Revenue Growth Contributors Intra-Group elimination 3. Cem Crem Singapore Aus Acquisitions (since 23) Prepaid Funeral Surplus Aus Funerals Volume (Comparable Business) Aus Funerals Pricing (Comparable Business) Source:, May 21 As can be seen in the chart above, the most significant contributors to the increases in revenue growth have been: Price increases; Acquisitions; Funeral volumes; and, Cem and crem revenues. Cem and crem revenue growth includes both price and volume growth as well as the movements in deferred revenues from pre-sales. Price increases sustainable Pricing has been the most significant contributor to revenue growth. has demonstrated the ability to increase prices at ~3 4% per annum throughout the economic cycle. We expect a big contributor to the price elasticity of funeral services is that price is understood to be well down the list of reasons a customer select a particular service provider. Figure 4 below shows the average funeral price increases IVC has achieved since listing. This growth reflects both pricing and mix effect. Figure 5 shows the increases in average funeral prices achieved by the two largest publicly listed US funeral service providers Service Corporation (SCI.nyse) and Stewart Enterprises (STEI.nsdq). While there are many differences in the markets, both companies have achieved reasonable price increases throughout the most recent economic slowdown. 2 January 212 3

4 Fig 4 IVC average funeral price increases Fig 5 US average funeral price increase 7% 6% 5% 4% 3% 2% 1% % % 5.% 4.% 3.% 2.% 1.%.% Service Corp Stewart Enterprises Source: Company data, Macquarie Research, January 212 Source: Company data, Macquarie Research, January 212 We view IVC s ability to continue to increase prices at least in line with inflation as sustainable and integral to the strong medium-term outlook for IVC. IVC closely monitors customer feedback. s presentation published 6 th May 11 suggested 87% of IVC s funeral customers and 98% of cem/crem customers indicated pricing was in line with or below expectations. Bolt-ons combine with strong organic growth rates The acquisitions undertaken through FY4 FY1 were typically smaller bolt-on type acquisitions. The acquisition of Singapore Casket company in 26 was a relatively large acquisition and provided an entry into the Singapore market, The acquisition of the Bledisloe Group in June 211 was the first (and the only real available one in Australia/NZ) major acquisition undertaken by. The acquisition increased s market share in the Australian market and provided an entry into NZ. The undertakings required by the ACCC as part of the acquisition suggests limited opportunity for future larger bolt-ons in Sydney and Brisbane, although opportunities are likely to continue to exist in other markets. Fig 6 Revenue Growth (before intra-group eliminations) $m FY4(a) FY5(a) FY6(a) FY7(a) FY8(a) FY9(a) FY1(a) Fig 7 Acquisition price Date Acquisition Location Consideration $m 26 22/12/25 Ann Wilson NSW $3.8 14/7/26 Drysdale QLD $7.2 2/1/26 Singapore Casket Singapore $2.4 Company 27 1/3/27 Liberty NSW $3.7 13/12/27 Chippers WA $ /8/28 Christian Funerals WA $1.4 15/12/28 Southern Cross Vic $ /7/29 Casket Company Embalming Singapore $ /6/21 WN Bull NSW $ /6/211 Bedisloe Aus/NZ $114 Cem/crem Funerals excl acqns Funeral acqns Source:, May 211 Source: IVC, Macquarie Research, January Figure 4 above demonstrates the cumulative revenue contribution from the acquisitions undertaken to 21. If we strip out the revenue and earnings contribution from the acquisitions undertaken, underlying organic growth rates remain robust. Compound revenue growth from FY4 to FY1 pre-acquisitions was 4.8%. Looking at the contribution to earnings, we estimate the contribution to FY1 NPAT of the acquisitions had been ~$4m ($31.5m revenue at group NPAT margin of 12.5%). 2 January 212 4

5 We have applied group margins in this estimation. While synergies from utilisation of shared services may mean higher margins from these bolt-ons, IVC s cem/crem business would be higher-margin than these funeral acquisitions. Fig 8 Organic Revenue growth Fig 9 Organic EPS growth $m % compound growth $m % compound growth FY4 FY1 ex acqn FY4 FY1 ex acqn NPAT Source: Company data, Macquarie Research, January 212 Source: Company data, Macquarie Research, January 212 Adjusting for the acquisition contribution suggests a still very strong underlying compound organic earnings growth of 8 9% per annum since listing. s favourable demographics tailwind appears set to get a whole lot stronger There has been a circa 1% increase in the average number of deaths in Australia in the last 1 years. Year to year, the number of deaths can vary as demonstrated in Fig 9 below Fig 1 Deaths per age group Fig 11 Change in annual number of deaths # of deaths Males Females Source: ABS, Macquarie Research, January 212 Source: ABS, Macquarie Research, January With the population ageing, in particular the ageing of the baby boomer generation ( ), ABS modelling predicts an acceleration in the death rate from 212. This is the year in which the first of the baby boomers reach the 65 and over bracket, the age at which there is a significant increase in mortality. 6.% 5.% 4.% 3.% 2.% 1.%.% -1.% -2.% -3.% January 212 5

6 Fig Population Fig Population Male Female Male Female Source: ABS, January 212 Source: ABS, January 212 As market leader, is extremely well positioned to be benefit from this increase in industry growth rates. As discussed above, since listing in 24 we estimate IVC has grown revenue and EPS at compound rates of 5% and 8% respectively before the impact of acquisitions. In absolute dollar terms, we estimate NPAT has increased by ~$12m from FY4 to FY1 before impact of acquisitions. Over that period, the number of deaths in Australia has increased by ~11,1 to ~143,5 in CY1. Based on ABS projections of the death rate increasing to ~1.6% from 212, the next 11,1 increase in deaths would occur in 4.5 years rather than 6. Assuming was to generate the same incremental net profit of $12m from the same 11,1 increase in number of deaths, this would maintain organic earnings growth rates for the group of ~7% off the higher earnings base. The above calculation assumes IVC s other drivers of revenue growth over that period remain constant. The incremental profit impact may well prove conservative as we have assumed constant margins. The group has surplus capacity in its operations and the extra volume throughput should result in higher utilisation and margins given the relatively high-fixed-cost nature of the operations. As market leader, was already extremely well positioned to benefit from this increase in industry growth rates. The timing of the Bledisloe acquisition ahead of the expected acceleration in growth rates has the group, in our view, even more well positioned, given the increase in market share. 2 January 212 6

7 Fig 14 FY11 result expectations ($ m, except for per-share figures) 1H1a 2H1a FY1a 1H11a 2H11e FY11e Change Sales % EBITDA % Depreciation % EBITA % Goodwill EBIT % Net Interest exp % Pre-Tax Profit % Tax Expense % Net Profit % Net Abn/Extra Reported Earnings % Adjusted Earnings % EPS (Adj/dil) EPS growth 15.1% 2.9% 8.2% 3.2% 13.5% 9.2% EBITDA/Sales 24.9% 26.7% 25.8% 24.6% 26.4% 25.6% EBITA/Sales 2.7% 22.6% 21.7% 2.4% 22.5% 21.5% DPS Payout ratio 83.5% 85.% 84.3% 84.3% 75.% 8.6% Source: Company data, Macquarie Research, January 212 Our FY11 result expectations remain unchanged and are detailed above. Reported profit will likely be lower than above, given the mark-to-market of the pre-need business that has been bought on balance sheet under the new accounting standards. IVC typically implement price increases in December. Under the new standard, the liability associated with the pre-need business is increased by the price increases. This is netted against the fair value movement of the FUM with investment earnings recorded as income. Given the fall in equities through FY11, these returns will not offset price increases and may in fact be negative. The change in accounting standards increases the volatility of IVC s reported earnings. There is no change to underlying cashflows. As long as IVC can achieve returns on its FUM in line with or above price increases, it generates margin and cashflow enhancement. The change in standard does increase the appeal of stable investment returns, but with a year typical duration of investment, we still think IVC is better placed with a growth biased investment portfolio. delivered a good 1H result with 1% revenue growth translating into 8% EBITDA growth. The death rate appeared to be reverting to trend. IVC estimated deaths in its markets increased 1.6% (pcp -.3%) in H1. The death rate continued on trend through to mid-august. Average prices in the funeral business had been sustained; however, memorialisation revenues had been more challenging. Our forecasts are predicated on ~1% increase in average number of deaths through H2. The key driver of profit growth in 2H11 and FY12 is the acquisition of Bledisloe Group. The October shareholder update indicated integration was going well. Management expect to realise around half of the $3.5m synergies being targeted in a run rate basis by end 2H11 with the remainder in FY12. Bledisloe is a material acquisition for IVC adding around 2% to sales and EBITDA (post synergies). It is also highly strategic. It expands the company into new markets in New Zealand, Tasmania and regional Queensland with a strong established position. It increases IVC s market share in Melbourne, a market it is currently under represented in, while further cementing its market position in areas such as Sydney and South East QLD. Bledisloe is estimated to have maintainable revenues of $65m and EBITDA of $1.9m. The additional $3.5m $4m of synergies expected to be realised over two years is largely from corporate and state based admin and shared services savings. Around half these could be expected to be realised with senior corporate management and overhead cost savings. Shared services savings are likely to come from improved procurement scale and asset utilisation given the location overlap. 2 January 212 7

8 Oct-11 Jun-11 Feb-11 Oct-1 Jun-1 Feb-1 Oct-9 Jun-9 Feb-9 Oct-8 Jun-8 Feb-8 Oct-7 Jun-7 Feb-7 Oct-6 Jun-6 Feb-6 Oct-5 Jun-5 Feb-5 Oct-4 Jun-4 Feb-4 Macquarie Private Wealth Our forecasts for the combined group are detailed below. Fig 15 Bledisloe contribution ($ m) FY11E FY12E IVC Bledisloe Combined IVC Bledisloe Combined Revenue EBITDA Source: Macquarie Research, January 212 Price Target $8.3 per share. Outperform. We value using a discounted cashflow model given the relatively stable industry and strong cashflow characteristics of the business. Our valuation and price target currently stands at $8.3 per share. The timing of the Bledisloe acquisition and the increase in market share it provides ahead of the expected acceleration in industry growth rates has the group, in our view, even better positioned. IVC has strongly outperformed through this period of earnings uncertainty and risk aversion and we expect it will continue to do so while current conditions persist. While its current one-year forward PE is broadly in line with its long-term average, it is once again trading at a significant premium to the market multiple and it is looking relatively full valued in the near term. Retain Outperform on a longer-term view. Fig 16 IVC PE rel ASX3 IVC 1yr fwd PER Source: Datastream, Macquarie Research, January January 212 8

9 (IVC:$7.54) 2-Jan-12 Interim results 1H/1A 2H/11A 1H/11A 2H/11E Profit & Loss 21A 211E 212E 213E Revenue Revenue $m EBITDA $m EBITDA $m Depreciation $m Depreciation $m Amortisation of goodwill $m.... Amortisation of goodwill $m.... EBIT $m EBIT $m Net Interest expense $m Net interest expense $m Pre-Tax Profit $m Pre-Tax Profit $m Tax Expense $m Tax Expense $m Net Profit $m Net Profit $m Outside equity interests $m..1.. Outside equity interests $m.1... Net Abn/Extra $m Net Abnormals/Extra. $m Reported Earnings $m Reported Earnings $m Adjusted Earnings $m Adjusted Earnings $m Gross Cashflow $m Gross Cashflow $m EPS (Adj/dil) c EPS (adj/diluted) c EPS growth % EPS growth % CFPS c PE (adj) x CFPS Growth % CFPS c EBITDA/Sales % CFPS Growth % EBIT/Sales % PGCFPS x Earnings Split % DPS c Revenue Growth % Yield % EBIT Growth % Franking % Profit and Loss ratios 21A 211E 212E 213E Cashflow Analysis 21A 211E 212E 213E Revenue Growth % EBIT Growth % Pre-tax Profit $m EBITDA/Sales % Depreciation & Amortisation $m EBIT/Sales % Tax Paid $m Effective tax rate % Gross cashflow $m Payout ratio % Changes in working capital $m EV/EBITA x Other $m EV/EBITDA x Operating Cashflow $m EV/Sales x Acquisitions $m Balance sheet ratios Capex - Plant & Equip. $m ROE % Asset Sales $m ROA % Other $m ROFE % Investing cashflow $m Net Debt $m Dividend (ordinary) $m Net Debt/Equity % Equity raised $m Interest Cover (EBIT/NI) x Other $m Gross Debt/EBITDA x Financing cashflow $m Price/NTA x.... NTA per share $ Net Change in cash/debt $m EFPOWA m Historical performance 27A 28A 29A 21A Balance Sheet 21A 211E 212E 213E Cash $m Revenue $m Receivables $m EBITDA $m Inventories $m Depreciation/Amortisation $m Investments $m EBIT $m Property, plant & equipment $m Net interest expense $m Intangibles $m Pre-Tax Profit $m Other Assets $m Tax Expense $m Total Assets $m Net Profit $m Payables $m Net Abn/Extra $m Short Term Debt $m Long Term Debt $m EPS (adj/dil) c Other Liabilities $m EPS growth % Total Liabilities $m Ordinary DPS c Shareholders Funds $m EBITDA/Sales % Minority Interests $m EBIT/Sales % Total Shareholders Equity $m ROE % ROFE % Total Funds employed $m EFPOWA m Segment information 27A 28a 29A 21a Funerals Cremations and Cemetries Singapore Casket co Other Total revenue EBITDA Margin 25.9% 24.9% 24.9% 25.8% Sydney (612) London (171) Hong Kong (852) Melbourne (613) Munich (89) New York (212) Source: Company data, Macquarie Research, January January 212 9

10 Important disclosures: Recommendation definitions Macquarie - Australia/New Zealand Outperform return >3% in excess of benchmark return Neutral return within 3% of benchmark return Underperform return >3% below benchmark return Benchmark return is determined by long term nominal GDP growth plus 12 month forward market dividend yield Macquarie Asia/Europe Outperform expected return >+1% Neutral expected return from -1% to +1% Underperform expected return <-1% Macquarie First South - South Africa Outperform expected return >+1% Neutral expected return from -1% to +1% Underperform expected return <-1% Macquarie - Canada Outperform return >5% in excess of benchmark return Neutral return within 5% of benchmark return Underperform return >5% below benchmark return Macquarie - USA Outperform (Buy) return >5% in excess of Russell 3 index return Neutral (Hold) return within 5% of Russell 3 index return Underperform (Sell) return >5% below Russell 3 index return Volatility index definition* This is calculated from the volatility of historical price movements. Very high highest risk Stock should be expected to move up or down 6 1% in a year investors should be aware this stock is highly speculative. High stock should be expected to move up or down at least 4 6% in a year investors should be aware this stock could be speculative. Medium stock should be expected to move up or down at least 3 4% in a year. Low medium stock should be expected to move up or down at least 25 3% in a year. Low stock should be expected to move up or down at least 15 25% in a year. * Applicable to Australian/NZ/Canada stocks only Recommendations 12 months Note: Quant recommendations may differ from Fundamental Analyst recommendations Financial definitions All "Adjusted" data items have had the following adjustments made: Added back: goodwill amortisation, provision for catastrophe reserves, IFRS derivatives & hedging, IFRS impairments & IFRS interest expense Excluded: non recurring items, asset revals, property revals, appraisal value uplift, preference dividends & minority interests EPS = adjusted net profit / efpowa* ROA = adjusted ebit / average total assets ROA Banks/Insurance = adjusted net profit /average total assets ROE = adjusted net profit / average shareholders funds Gross cashflow = adjusted net profit + depreciation *equivalent fully paid ordinary weighted average number of shares All Reported numbers for Australian/NZ listed stocks are modelled under IFRS (International Financial Reporting Standards). Recommendation proportions For quarter ending 31 December 211 AU/NZ Asia RSA USA CA EUR Outperform 56.59% 65.6% 54.55% 44.53% 75.28% 49.46% (for US coverage by MCUSA, 1.53% of stocks covered are investment banking clients) Neutral 33.45% 2.55% 38.96% 5.2% 22.47% 32.36% (for US coverage by MCUSA, 1.96% of stocks covered are investment banking clients) Underperform 9.96% 13.85% 6.49% 5.27% 2.25% 18.18% (for US coverage by MCUSA,.44% of stocks covered are investment banking clients) Company Specific Disclosures: Important disclosure information regarding the subject companies covered in this report is available at General Disclaimers: This research has been issued and distributed in Australia by Macquarie Equities Limited ABN ("MEL"). MEL holds Australian Financial Services Licence No and is a Participant of the Australian Securities Exchange Group. 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The analyst(s) principally responsible for the preparation of this research receives compensation based on overall revenues, including investment banking revenues of Macquarie Group Limited and its related entities. This research has been issued and distributed in New Zealand by Macquarie Equities New Zealand Limited ( MENZ ) an NZX Firm. Macquarie Private Wealth's (MPW) services in New Zealand are provided by MENZ. Macquarie Bank Limited ABN ("MBL") is a company incorporated in Australia and authorised under the Banking Act 1959 (Australia) to conduct banking business in Australia. Neither MBL nor any member of the Macquarie Group, including MENZ are registered as a bank in New Zealand by the Reserve Bank of New Zealand under the Reserve Bank of New Zealand Act Any Macquarie subsidiary noted in this document is not an authorised deposit-taking institution for the purposes of the Banking Act 1959 (Australia). 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