M4 BARRON’S December 7, 2020
EUROPEAN TRADER
D
ignity,Britain’s only publicly
listed funeral director, has seen
its shares get a boost from an
aggressive expansion fueled by
buying independent rivals. But its acqui-
sition drive slowed along with earnings,
and Dignity faces the possibility of losing
some market share to rivals.
Dignity (ticker: DTY.UK) had a strong
track record of delivering earnings and
dividend growth as it grew to 800 fu-
neral locations. Shares tripled to 2,820
pence ($37.58) over six years to 2016, and
slumped to 820 pence within two years.
The stock slid to about 243 pence in
June over worries about how a regulatory
investigation into competitive practices
might change the industry. But prelimi-
nary findings in the report didn’t call for
a much-feared price cap on funeral
charges, and the stock has risen to 735
pence. Dignity’s stock is up 25% this
year—but could fall again. Government
regulation on pricing could still be on the
horizon. And some competitors are offer-
ing customers less expensive funerals or
have cut prices as they consolidate.
And while Dignity has conducted
almost 10,000 more burials and crema-
tions in the first nine months of 2020
than in an average year due to Covid-19,
the average price of funerals decreased
as the bereaved opted for simpler and
cheaper services due to lockdowns.
There have also been restrictions on
the number of people allowed to gather,
and in July, Dignity stopped providing
limousines and offering church services,
which are income drivers. The company
is also midway through a strategic re-
view, and its CEO left in April.
Greg Lawless, an analyst at private-
equity firm Shore Capital, estimates that
the stock could decline to 555 pence, a
drop of more than 20%. In aNovember
note he wrote, “Not surprisingly, there
is no guidance beyond the current year,
given the uncertainty around funeral
restrictions and the potential changes to
the broader landscape that could be on
the horizon.”
However, he was upbeat about an in-
dependent review of Dignity’s property
assets of about 461 million pounds ster-
ling ($513 million), which is far higher
than the net book value of £44 million.
While the property valuation is attrac-
tive, it’s largely offset by net debt of
£479 million.
The business, based in Sutton Cold-
field, England, has a market value of
£358 million and employs 3,304 workers.
It fetches 15.9 times this year’s expected
earnings and is valued at a 20% discount
to its peers. In its March earnings report,
Dignity swung intothe black, posting a
pretax profit of £44.1 million for the year
ended on Dec. 27, 2019, an improvement
on the previous year’s £18 million loss.
Full-year sales were £338.9 million.
Although the preliminary report from
the Competition and Markets Authority,
or CMA, industry investigation didn’t
recommend price caps, a separate regula-
tor, the Financial Conduct Authority, an-
nounced last week that it will regulate the
prepaid funeral market. While this could
increase administration costs, Dignity is
in a better position than smaller rivals to
weather that. InNovember,Dignity Exec-
utive Chairman Clive Whiley said, “We
still have a long way to go, and the strate-
gic review will take time to ensure we are
prepared for every eventuality.”
It will take the “serious pricing and
product trials, alongside competitor reac-
tions and the CMA final outcome, to
define a strategy that harnesses the full
capacity and bandwidth of our business,
where we remain determined to grow
market share without further dilution
for shareholders,” Whiley said.
While there are few certainties in life,
Dignity faces too many uncertainties
right now for it to be very attractive to
prospective investors.B
By Rupert Steiner
EMERGING MARKETS
Mexico’s Bonds Are More
Attractive Than Stocks
F
or a long time now, Mexico has
had a rotten stock market but
great bond market.
TheiShares MSCI Mexico
exchange-traded fund (ticker: EWW) has
lost more than 20% over the past five
years, compared with a 48% gain for
global emerging markets and a 75% re-
turn on the S&P 500 index. Mexican
sovereign bonds, by contrast, have sel-
dom yielded less than 6% for a 10-year
note, while the peso has held more or less
steady against the dollar.
The country has been through tumult
over the past two years, with a leftist
president taking power, a calamitous
collision with Covid-19, and then a rally
on vaccine-driven optimism. But not
much has changed in market terms.
Among emerging markets, Mexico is still
a magnet for fixed income, yet so-so at
best for equities.
“The bonds are looking more attrac-
tive than many others in EM,” says Yung-
Yu Ma, chief investment strategist at
BMO Wealth Management. “Stocks are a
little more of a mixed picture.”
For a country of 126 million on the
doorstep of the U.S., Mexico offers a sur-
prisingly stodgy roster of stocks. The
closest thing to a prominent tech name is
telecom providerAmerica Movil
(AMX).
The rest of the index is dominated by
old-school consumer companies like
Wal-Mart de Mexico(WALMEX.Mex-
ico) andGrupo Financiero Banorte
(GFNORTEO.Mexico). These proved
unalluring as Mexican gross-domestic-
product growth slumped to zero even
before the pandemic.
President Andres Manuel Lopez Obra-
dor’s response to the coronavirus hasn’t
helped matters. Mexico ranks ninth in
the world in Covid deaths per capita. But
AMLO, as the leader is known, has been
uniquely stingy in offsetting the eco-
nomic effects, sticking by his ideology of
“republican austerity.”
His economy is projected to contract
by 10% this year, compared with 4% in
freer-spending Brazil. Official poverty
has risen from 35% to 44.5%, observes
Luis Maizel, the Mexican-born co-
founder of LM Capital Group. “People
are starting to steal because they can’t
feed their kids,” he says.
The contraction digs a deeper hole for
consumer companies to climb out of next
year. Mexican stocks jumped more than
20% in the past month on encouraging
vaccine news. But they may struggle to
advance further.
“We see less room for a further rerat-
ing in stocks,” says Gabriela Soni, chief
investment officer for Mexico at UBS
Global Wealth Management.
AMLO’s tight wallet is positive for
bond investors, though. Mexico has
maintained a positive current account
balance, is bulging with currency re-
serves, and is secure for now in its invest-
ment-grade credit rating.
A hawkish central bank pitched in by
holding rates at 4.25% last month, which
translates to a 5.7% yield on 10-year peso
bonds. That’s impressive if the currency
holds near current levels at around 20 to
the dollar, as investors expect.
“With markets returning to the hunt
for yield, Mexico still looks attractive,”
says Ilya Gofshteyn, senior emerging
markets macro strategist at Standard
Chartered Bank. He is targeting 19 pesos
per dollar by next March.
Mexican stocks are still cheap histori-
cally, priced at 14 to 15 times expected
earnings against an average of 16 to 17,
points out Daniel Gewehr, head of Latin
American equity strategy at Banco San-
tander. And AMLO might ramp up
spending ahead of midterm elections in
June, juicing growth and ruffling fixed-
income investors.
But for now it looks like the same-old
in Mexico: Buy bonds, not stocks.B
By Craig Mellow
Challenging Outlook for
Funeral Group Dignity