Why Bell Potter is bullish on this unique defensive stock

Bell Potter analyst Chami Ratnapala rated cemetery, funeral and crematoria heavyweight Propel Funeral Partners (ASX:PFP) a BUY on Wednesday. 

The stockbroker has given PFP a price target of $5.70. 

This reflects a 12 month total shareholder return of 34%.

That calculation used a closing price of $4.35, as at 1300 AEST Wednesday 15 February 2023 the stock is trading at $4.41. 

Quick overview of 5Y performance

Propel is the second largest provider of end-of-life ceremonial services in the Australia and New Zealand region, after InvoCare (ASX:IVC). 

The company’s share price has been steadily growing in a stable fashion ever since the COVID pandemic, summary evidence of solid underlying growth (and a unique defensive stock). 

Excluding March 2020, the company’s last 5Y low was $2.46 in January 2019. The stock listed on 30 November 2017 at $3.41. 

Propel hit an all time high of $4.96 in May 2022, while a plethora of macroeconomic headwinds dragged down performance for ASX stocks across the entire bourse. 

Bell Potter sees the stock climbing towards $6 per share ($5.70) by February 2024. 

Propel was able to avoid the worst of market carnage in the first year of COVID, and then stood out as one of few ASX stocks that posted solid gains all throughout last year.

Why is Bell Potter bullish? 

In short, analyst Chami Ratnapala sees proof Propel has what it takes to successfully translate strategic acquisitions into shareholder value. 

Its latest acquisitions are a fundamental driver of the BUY rating awarded to Propel on Wednesday. 

“PFP has completed and/or executed a binding sale agreement to acquire 2 funeral service businesses and 1 pet cremation businesses, Alfred James & Sons in SA and Seddon Park Funeral Home / Pets at Rest in NZ totalling to 10 locations,” Ratnapala wrote. 

Those three businesses conduct approximately 1,200 funerals per year and up to 7,000 pet cremations generating an aggregated approximate $12m per year. 

Margin growth from the acquisitions is expected to flow into FY24.  

All three businesses will cost Propel $36.9m with roughly 75% of those costs related to the acquisition of real estate. Existing debt facilities will be drawn down. 

South Australian footprint growing 

Acquisitions are one thing, but so is scale—and this is the secret ingredient that has Bell Potter taking note. 

Propel is shaping up as one of South Australia’s dominant funeral, cemetery and cremation providers off the back of its recent acquisitions. 

One downside to keep in mind: none of the companies Propel is acquiring in this tranche own crematoriums outright, and this is expected to act as a headwind to margin upside.

 A look at Propel's 5Y charts