Investment Column: Dignity's shares need an extra lease of life
Dignity; Shanks Group; Clarkson
Friday 12 March 2010
Our view: Hold
Share price: 678p (+0.5p)
Despite the shockingly cold weather this winter, fewer elderly people have died since 1 January than passed away in the first quarter of 2009, figures show. And remarkably, despite all the hullabaloo about swine flu, one of the main reasons for the low death rate is the unusually low number of flu cases.
This, of course, has been bad news for Dignity, Britain's biggest chain of funeral directors. Nevertheless, the company said yesterday it was upbeat about its prospects for 2010 as it reported a 6 per cent increase in profits last year.
Dignity's business model is simple: it goes around the country buying up highly regarded, independent undertakers on the high street, and then does nothing to alter them. Once in situ, it can expect a steady stream of business and we reckon that investors can do pretty well backing the group. First and foremost, Dignity has increased its full-year dividend to 8.07p per share. The yield, at 2 per cent, is hardly that exciting, but it is moving in the right direction. It is our view that, with £46m in cash on the balance sheet and debts at manageable levels, Dignity should return more to its shareholders.
The group argues that the money can be better spent on acquisitions, but the dividend is important for Dignity investors. The company was always seen as a safe punt during the downturn because, let's face it, people do not stop dying during a recession. Nonetheless, as markets have improved, investors have diverted more capital to the likes of the fly-by-night banks and miners.
Dignity's shares have jumped by just 10 per cent the past year, suggesting to us they are fairly valued, trading on a 2010 price-to-earnings ratio of 15.5 times. In the longer term, the so-called "baby boomers" are expected to start dying off in large numbers over the next few years, which will provide a fillip for Dignity's businesses. In the shorter term, while the company is very much alive and kicking, we reckon investors should pause. Hold.
Our view: Buy
Share price: 104p (-4.4p)
Shanks has had a rough few days. The waste management company has seen its share price slump, then soar and come under pressure again after it broke off talks with the buyout specialist Carlyle.
When Shanks first said earlier this week that it was walking away from Carlyle, its stock fell 15 per cent. The share price reversed course in the subsequent session, rallying as the bargain hunters moved in. Yesterday, Carlyle also confirmed that it was backing off and had no current intention of making an offer, which sent Shanks back down again.
Bid or no bid, the bargain hunting is the part of the story that interests us, because the volatility seems to have left Shanks fundamentally undervalued. As Goldman Sachs analysts pointed out on Tuesday, the initial sell-off left Shanks's stock at a discount to both the sector and to its own historical multiples (it currently trades on a multiple of 8.67 times forecasts for the full year, according to Reuters).
Shanks is heavily exposed to its non-municipal waste business, which is sensitive to ups and downs in factory output. With the economy on the mend in the UK and in the other parts of Europe where Shanks operates, this exposure should pay off and boost the company's earnings. Those still holding out for deal activity may also get their wish, with Goldman refusing to rule out the possibility the other day. Buy.
Our view: Buy
Share price: 865p (+35p)
The shipping services company Clarkson hopes to have put the recession behind it. Its financial results for 2009, published yesterday, showed its revenues fell 29 per cent to £177m and pre-tax profits slumped 43 per cent to £22.5m. It was hit hard by a £21m exceptional charge settling a legal case.
Behind the tricky numbers, though, Clarkson has plenty of cash, has gained market share in the downturn and, as a sign of confidence, chose to increase its dividend by 1p to 43p. More vitally still, the commodities markets are improving, which has led to an uptick in business.
Clarkson's shares have already risen by about 90p in recent weeks, but there is still more to go. Panmure estimates put the price-to-earnings ratio of the stock at about seven times, based on this year's revenue forecasts. And when the impact of last year's investment cuts across both the shipping and commodities sectors start to feed through in a few years' time, business for Clarkson will be booming again. Buy.
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