Grim Reaper Stocks

“In this world nothing can be said to be certain, except death and taxes.” Benjamin Franklin

Ok this post can be quite morbid, so if you are not into companies dealing with Death, this post is not for you.

Yes, we all die someday. If you are looking for the ‘Sure’ thing, “Death” companies are as close as one can get. In good markets, bad markets (or no market); even if banks collapse, the Federal Reserve raise interest rates to 10%, oil / gold prices plunge to $1, even when we are in the deepest longest recession / depression – these companies get businesses (24/7, rain or shine).

On another note, we may be alright about cutting back on our expenses on food, transport, entertainment, education etc, but when there is a death in our family, penny-pinching would be the last thing on our mind. No expense spared for the final farewell.

Sometime back when I was reading the Peter Lynch book, “One Up On Wall Street”, I came across an article on funeral house (read here). Lynch likes companies with something depressing about them. To him SCI (Service Corporation International) is one such perfect stock. No kidding, it is under the chapter “The Perfect Stock, What a Deal” in the book. Trust Peter Lynch, to take something so morbid and dull and make it sound so happening – “McBurial”.

Incidentally, SCI is North America’s largest single provider of funeral, cremation and cemetery services.

In one of my earlier posts, I mentioned that funeral parlour makes the perfect business (read here).

Recently, while I was watching a video on an interview with Mohnish Pabrai, I was reminded of the Funeral Houses again (click here – you can forward to 31.20 min). He was using the case of SCI  to show how irrational the market can be. Case in point, the Dow was down 300 points for that day, and the shares of all kinds of businesses were consequently marked down including SCI which was down 2% that day. Whatever the reason that caused the Dow to go down 300 has no effect on the business of SCI (did not increase human life expectancy) yet SCI shares were down by 2%.

Ok, I thought Singapore Market has no listed Funeral Houses (was highlighted by a reader later that there is: Asia Pacific Strategic Investments) –  So I went searching online for companies dealing with death in the US market.

To cut a long story short: In the US, there are quite a number of companies that operates in the death industry (read here, here and here).

• Hillenbrand, Inc. (HI)
• Service Corp. International (SCI)
• Matthews International (MATW)
• Walmart (WMT)
• Carriage Services Inc. (CSV)
• 1-800-Flowers.com (FLWS)
• Rock of Ages Corp. (ROAC)

Of the trio (the 3 companies highlighted above), SCI is the biggest. There are a lot of articles online about SCI (Enterprise value of USD 8.37B), from their recent acquisition of the next-largest chain (Stewart Enterprises), to how their services are more expensive and how it made SCI’s founder and chairman, Robert Waltrip became very wealthy. SCI was notorious for its growth via acquisition (hence, Peter Lynch’s term – McBurial). The acquisitions did come at a price though eg. too much leverage:

The buying frenzy eventually encompassed businesses in 15 countries, from Britain to Argentina to Australia. In the ’90s other financiers took notice, and a funeral home bidding war broke out. Acquisition prices soared. SCI accumulated $4 billion in debt. Depleted by interest payments, it notched consecutive losses from 1999 through 2002. The stock price fell from $45 in mid-1998 to $1.75 in late 2000. To survive, SCI had to reverse course, selling most of its foreign holdings and a number of American ones. Oddly, it was during this dire period of contraction when SCI saw itself satirized on the HBO (TWX) series Six Feet Under as Kroehner Service Corp., a soulless conglomerate seeking to acquire the dysfunctional Fisher family’s funeral home.

I subsequently did some reading on Service Corp. International, Hillenbrand, Inc., & Matthews International. The common issues are as follow:

• The slow growth of this industry. Deaths in the U.S. are forecast to increase at an average annual rate of 1.1 percent over the next five years (from 2011). Nevertheless, the US funeral industry accounts for about $20 billion in annual economic activity, with around 130,000 employees that make a living on the 1.5 million people that go to rest each year.
• The rise of cremation vs burial (due to rising cost of burials, public concerns about overcrowded graveyards, and personal considerations). The cost of burial is approx $12,198 while cremation is only approx. $6,355 (read here and here). In 2014,  42% of people are cremated. For these companies, Cremation would represent lower profit margins.
• The competition from low cost caskets. Eg. Walmart begin the trend of selling low-priced caskets online. Even Amazon is involved.

I do not find the financial fundamentals of these three US companies spectacular (in my opinion – average at best) – see table below. Often they have more debt than cash, with average Profit Margin, Operating Margin, ROE and ROA. Their ROE / ROIC over the years are inconsistent and there is no overall upward trend. Well then again, Peter Lynch’s book “One Up On Wall Street” was published way back in 1989 – so much for the Perfect Stock.

So I started doing some more reading, and one thing led to another, I found three death care companies listed on the Hong Kong market and one death care company listed on the Taiwan market.

• Fu Shou Yuan International
• Nirvana Asia Ltd
• Anxian Yuan China Holdings Limited
• Lung Yen Life Service Corp

Some brief introduction:

Fu Shou Yuan is the largest provider of death care services in China in terms of revenue and geographical coverage. It is one of the first private company entrants into China death care services industry when it began operating a cemetery in Shanghai in 1994. The Company operates sites in eight major cities across China, and offers a complete range of funeral services ranging from the initial planning of the funeral arrangements and interment, to the organisation and hosting of the funeral and post-funeral services.

It was only recently listed on the Hong Kong Stock Exchange on Dec 2013.

Demand swells for IPO of China burial services group Fu Shou Yuan (read here)

Death Dealing Company Attracts Investor Interest (read here)

Nirvana Asia which calls itself the “largest integrated death care service provider in Asia,” sells tombstones, funeral services, and burial plots in Malaysia, Singapore, and Indonesia, mostly to ethnic Chinese Buddhists and Taoists.

It was only recently listed on the Hong Kong Stock Exchange on Dec 2014. (Click here for its corporate video)

Nirvana Asia’s IPO looks at strong HK debut (read here)

Kong: Nirvana Asia will deliver on promise to investors (read here)

Anxian Yuan is a cemetery developer and operator in China, and is principally engaged in the management of cemetery in Hangzhou, Zhejiang Province, the PRC, including operating and managing cemeteries, burials, ash memorial storage and funeral services as well as selling funeral-related products. The Group’s project in Hangzhou, Anxian Yuan has a total site area of approximately 647,715 square meters. As at 30 September 2013, approximately 142,503 square meters had been developed as a cemetery which includes burial sites, a green zone and amenities, including approximately 1,560 tombs and 24,000 columbaria and niches.

Lung Yen Life Service Corp is principally engaged in the provision of funeral services, the leasing and distribution of residential and commercial buildings. The Company provides Chinese funeral ceremony and other services, residential buildings, apartments and other buildings, including housings, offices, stores, factories and parking lots, among others. The Company operates its businesses primarily in Taipei, Taiwan.

Set up in 1992 by David Lee, Lung Yen’s operation has grown to dominate Taiwan’s cemetery and funeral services business. Lung Yen runs seven cemeteries in Taiwan and offers sophisticated funeral services. It has some 3,000 employees.

Lung Yen is the world’s third largest funeral services company, according to Forbes, after America’s Service Corporation International, and Hillenbrand Incorporated.

Taiwan funeral company sets sights on Singapore (read here)

Let’s look at their financial fundamentals found in Yahoo Finance (see below). Unfortunately, I can’t find the key statistics of Lung Yen Life Service Corp.

My first feel is that as compared to their US counterparts, the profit margin, operating  margin and Return on Equity are significantly better. Also except for Anxian Yuan, they are in net cash position, with low Total Debt / Equity ratio and high Current Ratio.

Interestingly, their P/E and EV/EBITDA ratios are considerably higher than those of their US counterparts (people probably felt that these are growth companies). Well if you read about the investing frenzy during Fu Shou Yuan and Nirvana Asia’s IPO, you might mistake them for another hot tech stock.

Among the trio, Nirvana Asia stands out by its high profit margin, operating  margin and Return on Equity, and net cash position.

The dividend yield of Nirvana Asia is 2.8%.

Nevertheless, the downside here is that Fu Shou Yuan and Nirvana Asia are only recently listed, so historical financial data is a bit lacking.

 

I may be a bit bias towards Nirvana Asia as I have been to Nirvana Memorial Garden (under Nirvana Asia) in Choa Chu Kang Road, Singapore some years back when one of my relative passed away and I was literally blown away! Had to push my lower jaw back up from the ground (click here to watch a video about it). The price of a lot inside can set you back by SGD $5,000 to $20,000. Click here and here.

In addition, some of my relatives have bought niches in Nirvana Memorial Garden (preparing for their after life). It is funny listening to my aunts joke about having booked a place there. However, I can’t help feeling a tinge of  sadness though.

 

From a macro economic point of view, many events work in its favour.

• In land scarce countries like Hong Kong, Singapore (read here) and Taiwan, the situations work in the favour of building more columbariums. If I am not wrong, the price per square feet of these buildings should easily beat high class condos or commercial properties (moreover Nirvana Memorial Garden is located in remote areas in Choa Chu Kang) – move over CapitaLand / GuccoLand.
• The rapidly aging population of Singapore and China (it is planning on expanding into China – read here), coupled with the growing wealth of ethnic Chinese middle class in Singapore, Malaysia, Thailand & Indonesia – there is a steady inevitable business stream. Nirvana’s business targets the premium segment. Read here. Geez.. This is one industry where an aging population is actually beneficial.

When you combine the ‘sexy’ words of Land Scarcity, Aging Population, China, Growing Wealth of Ethnic Chinese – you have one hot stock. No wonder analysts are bullish about the company (read here). It is simply amazing how these companies can turn the sunset of human life into a sunrise industry (sorry, I can’t resist the use of oxymoron puns here).

To maybe stretch the comparison of these companies with property developers: For one, these companies building columbariums don’t have to worry too much about maintenance cost – well the ‘residents’ for sure won’t be complaining very much. You compare that to the jobs of REIT managers or condominium MCST (Management Committee)- with the endless requests from the occupants.

Also they are immune to any cooling measures from the government (well the government of China, Hong Kong and Singapore all have regulations preventing the speculation of properties).

The marketing approach of Nirvana Asia is also strikingly similar to that of selling properties. Eg. Buying a plot in a cemetery with good Feng Shui now as a hedge against future price increase (so that your family members won’t be burdened by the high cost later). Pay for the cemetery plot or niche via installment with discount now versus forking out a higher lump sum later.

Let’s go into the specifics. The business of Nirvana Asia and Lung Yen Life Service Corp is slightly difference from that of Fu Shou Yuan and  Anxian Yuan – the former two companies sell so-called “niches,” or reserved spots for relatives to leave the urns of the deceased. The high-rise version of cemeteries.

The unusual business model of Nirvana Asia, Hong Kong’s latest “death care” IPO (read here)

Earlier on I have mentioned about Nirvana Memorial Garden. It is literally the 5 star hotel version of the columbariums – or more specifically it is a six star premium & luxury columbarium in Singapore. I see as the combination of the bling of luxury + religion + ceremonial dignity of death.

Base on the article above, Nirvana Asia derives most of its profit from the sale of Niches.

Incidentally, Lung Yen Life Service Corp intends to expand into Singapore as well (read here).

Life Corporation is the other company which appears to be building ‘niches’ in Singapore. Base on an article in March 2015 (read here), the agreement between Eternal Pure Land (EPL), a subsidiary of Life Corporation and the Singapore Government to build a columbarium in SengKang is terminated. Nevertheless, the Government will release a 0.1ha plot of land along Tampines Road north of Paya Lebar Airbase, zoned for cemetery use, to the company for a “pilot project” for columbarium services. It will be Singapore’s first fully automated columbarium facility (read here).

Life Corporation is an Australian company which was originally set up as a cord blood banking company named Cordlife in 2001. In 2013, Life Corporation sold off Cordlife and re-established itself under its current name, with a new focus on funeral services.

Perhaps Life Corporation felt that the business of death is more lucrative than the business of life.

However when it comes to premium & luxury columbarium, Nirvana Asia & Lung Yen Life Service Corp seem to operate within an oligopoly in Asia. In Singapore, Nirvana Asia has a monopoly in the premium niche segment. Fu Shou Yuan operates a chain of high-end cemeteries across China. Anxian Yuan is a cemetery developer and operator in China.

In this article, it mentioned that the five church-run and temple-run columbaria interviewed said they have no plans to offer upmarket services in Singapore.

Base on Nirvana Asia’s interim results and its expansion plan (see below), it appears that the company is doing well.

• Article in Straits Times in Jan 2015 highlighted that Nirvana will be building more niches in a new block at its existing compound in the next five years. This could double its total number of niches, which stands at about 20,000 in Jan 2015. (read here)
• Its recent Interim Result does not disappoint (read here)- Adjusted profit for the period attributable to owners of the Company increased by 13.7% in USD terms or 26.8% in RM terms as compared to 1H 2014. (Would have been better if not for the falling Malaysian currency in relation to USD).

Carving a niche in after-death services (read here)

Nevertheless, as mentioned by one of the earlier article- dated Jan 2015 (trying not to sound like a property analyst):

• There were about 18,000 deaths here a year from 2009 to 2014.
• There were almost 13,000 cremations at Mandai Crematorium in 2014. This is expected to “increase significantly as our population ages rapidly over the next two decades.
• NEA said 148,000, or nearly half, of the 325,000 niches in Mandai, Yishun, Choa Chu Kang and Upper Aljunied are occupied. (So we have close to 177,000 unoccupied niches)
• Nirvana has around 20,000 niches (and plan to double that in the next 5 years). I am unable to find out how many niches Life Corporation intend on building in Singapore.

So in the next five years, there will be more than 152,000 [177,000 + 40,000 – (13,000 x 5)] empty niches. Of which 40,000 (26%) are the ‘premium” niches.

If you are an elderly Singaporean (who is a Taoist or Buddhist) who wants a premium niche, there is only one place to go – Nirvana Memorial Garden in Choa Chu Kang, Singapore. You are unlikely to buy a premium niche in Taiwan, China or Hong Kong. And the number of good niches in good locations (eg. near the eye level) with good Feng Shui is very limited – to die for so to speak (in the primary market the price is controlled, in the secondary resale market where people sell what they have already bought, the price can be very high. It is just one big auction).

And suppose we use the law of property selling- example if I am a developer building a new condo, I would peg my new condo unit price slighter lower than the price that was transacted in the resale market recently at a neighboring plot rather than on my land + construction cost or rental potential or a slight mark up over my previous condo unit selling price (just a snow ball effect). With the limited supply + the fact that I am the ‘only developer’, I have a good control on the selling price, I can be the price setter. If you believe in good location, good Feng Shui, you would book that rare ‘niche’ at the high price (and still think you got a steal, cause your only other option is to pay for one in the resale market which is more expensive).

Let’s say, the average price of the new 20,000 niches are SGD7,000, Nirvana would be making a revenue of SGD140 million in the next 5 years just in Singapore alone selling niches. Reading past reports, seem like the price of niches has been increasing quite fast.

There have been some discussions on the topic of allowing people to buy and sell their urn seat for profit in a forum in 2011 – click here.

 

Let’s do a quick calculation of the Trailing PEG and Intrinsic Value of Nirvana Asia Ltd.

1) Trailing PEG

• P/E: 14.33
• Dividend Yield (%): 2.85
• EPS compound growth rate (3 yrs): 27.97%

The trailing PEG will be 14.33/(2.85+27.97) = 0.46. Which is good (< 1).

2) Intrinsic Value

First let’s look at the estimated 3 years earning growth (only have 3 yrs since it was only recently listed in Dec 2014). We are going to use a time-frame of 5 years from now for this purpose. Given EPS and a PE ratio, stock price can easily be calculated for any company. Using the below formula.

F = P(1+R)^N where:

• F = the future EPS
• P = the starting (present) EPS (0.19)
• R = compound growth rate (27.97%. However let’s take a 30% discount since it does not have a long consistent financial history and use 19.579% as I am not really sure if growth can be maintained.)
• N = number of years in the future (5)

Estimated future EPS: 0.46

I will be estimating the future PE of Nirvana Asia Ltd to be 10.2 (See below data from Morningstar).

Future Stock Price

P=EPSxPE

• P = future stock price
• EPS = future EPS
• PE = future PE

Hence future stock price of Nirvana Asia Ltd is 10.2 x 0.46 = 4.692

 

Intrinsic Value

P=F/(1+R)N

• P = present (intrinsic) value
• F = future stock price (4.692)
• R = MARR (15% or 0.15)
• N = Number of years (5)

Hence, the intrinsic value of Nirvana Asia Ltd is HKD 2.33.

Stock price of Nirvana Asia Ltd on 7 Oct 2015 is HKD 1.97.  Hence, there is margin of safety of 18% (even after a 30% reduction in the EPS growth).

 

In gist:

I will be keeping a look out for this company. If I do buy the shares of this company, it would literally break my Glam Index record. It would be more unglam than Colex. It would also be a very controversial company.

Colex Holdings Ltd: My most obnoxious stock (read here)

There is a reason why I write more than I talk about my stocks. They just don’t make hot conversation topics. Imagine how the conversation will be like with someone I just met (let’s call him John).

John: Oh I heard you invest in the stock market. I myself invest too. I have previously bought Apple, and am looking at Facebook and GoPro. So what companies do you invest in?

Me: Oh I like fundamentally strong companies, preferably those with low debt and some growth… etc

John: Hmm.. Like ?

Me: Riverstone, Vicom, Fasternal, ISOTEam, Colex, Nirvana Asia…

John: Not sure I heard of them .. what do they do?

Me: One deals with gloves, One deals with testing & inspection of cars & building materials, One sells bolts and nuts, One maintains HDB blocks, One collects rubbish, and the last is a Funeral House that build columbariums….

John walks away before I could complete my sentence.

Shall leave you with this song.