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Dignity - shares mourn as the CMA launches a funeral sector review

By Chris Bailey | Friday 1 June 2018

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from ShareProphets). I have no business relationship with any company whose stock is mentioned in this article.

I noted in my last write-up on under pressure funeral operator Dignity (DTY) that in its last earnings conference call they wished they could be more precise about future prospects. Well all the coffins are in the air again today as the Competition and Markets Authority (CMA) has announced 'a review into the £2 billion funerals market to ensure that people are not getting a bad deal'. Ouch.

And if you read on in its release today you can see the reasons why the CMA is worried. Potentially unclear information, those on the lowest incomes spending 'up to one third of their annual income on a funeral' and concerns over the rising level of cremation fees. No doubt Dignity will offer a view or three by the 28 June deadline...and will be waiting nervously for the draft report in six months...and the final report in a year's time. The trouble is - as stock market investors - that is a huge bunch of extra uncertainty.

It is going to be a while before Dignity can be truly and credibly precise in its thoughts and forecasts...and that just means a lower multiple. After all - as the CMA notes - even in a year's time the spectre of disinflation and change may not be over: 'If it finds issues of particular concern, the CMA could take further action, such as opening consumer or competition enforcement cases or launching a full market investigation'.

Still at least the scope of the CMA review does not include the pre-paid funeral sector...mainly because 'HM Treasury is launching a separate Call for Evidence on regulation in the pre-paid funerals sector'. Double ouch? Well, Dignity may have less problem with regulation given its larger company processes and compliance capability. Nevertheless, to pick up one review is unlucky...

Back on the day of the big Dignity plunge a few months ago now, I attempted to do some cash flow numbers to see at what level/yield taking this company private might seem attractive. I did note sub 10 quid you could find some angles on this. Ultimately the stock did pick up some support then and - as written up at the link above - the last update was a tad ahead of hopes with Dignity's funeral sales and pricing not getting crushed.

However today's move is perfectly justified despite the recent better trading as what matters is where the sector and pricing is going not where it has been. This smells to me like another burgeoning victory for the information age, choice...and lower prices. Dignity is going to have to cut back its margins a bit and, with this plus a general heightening of uncertainty courtesy of the CMA/HM Treasury, I am still watching not investing. This one feels as if - again - it is going to go lower.

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