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Is Propel Funeral (ASX:PFP) A Buy After NZ Acquisition?

Shares in Propel Funeral Partners Ltd (ASX: PFP) will be on watch today after the company announced the acquisition of a New Zealand based funeral operator this morning.

Propel Funeral Partners is the second largest funeral operator in Australia and New Zealand behind InvoCare Limited (ASX: IVC) . Propel currently has operations in 120 locations including 28 cremation facilities and cemeteries.

NZ Acquisition

This morning, Propel announced the acquisition of Graham’s Funeral Services along with certain freehold properties in the North Island of New Zealand.

The total consideration to be given for the purchase will be approximately NZ$8.5 million, made up of NZ$7.28 million cash and the issuance of 227,510 ordinary shares in Propel at an issue price of A$3.07. A further NZ$0.5 million will be payable upon certain performance hurdles being met in the first 3 years.

Graham’s Funeral Services was established in 1935 and is managed by the founder’s grandson, Mark Graham. The business conducts around 350 funerals per year and generated approximately NZ$2.7 million in revenue last financial year.

As part of the proposed transaction, Propel will also obtain four freehold properties including 2 funeral homes, a chapel and a residential property.

The company estimates the acquisition will increase annualised revenue by circa 2.1% and is expected to be immediately earnings accretive.

The transaction is expected to be completed during the second quarter of FY20.

Management Reaction

Commenting on the acquisition, Propel MD Albin Kurti said: “Graham’s Funeral Services will expand Propel’s network in the North Island of New Zealand, which is a core market. The team and I are pleased that Mark will continue the Graham family’s 84 year association with the business. We look forward to partnering with Mark and welcoming his staff to Propel.”

Graham’s Funeral Services MD Mark Graham was very pleased with outcome, saying that, “As a family, we like that our future shareholding in Propel ensures a strong alignment and we’re pleased that our staff will be joining a supportive and growing funeral operator. I really see this as an exciting next step for the business.”

My Thoughts On Propel

The company has been steadily acquiring funeral operators in recent years and is building itself a nice portfolio of high quality assets that deliver a defensive stream of earnings.

The ageing population will be a long-term tailwind for funeral operators and if the business can also gain a higher percentage of market share, it will be well-poised to make solid profits for many years to come.

Outside of InvoCare, the funeral industry remains highly fragmented which should mean there will be plenty of opportunities to make similar acquisitions in the coming years.

Whilst Propel is a very sound business that I would be happy to own, I’m not prepared to pay the current asking price and will need to see a pullback before entertaining the idea of buying in.

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At the time of publishing, Luke has no financial interest in any companies mentioned.

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