Peel Hunt downgrades Dignity on CMA review

Peel Hunt cut its stance on funeral services provider Dignity on Thursday as the Competition and Markets Authority said it was launching a full investigation into the funeral market after identifying "serious concerns" over large price hikes.

The brokerage downgraded Dignity to 'sell' from 'hold', citing greater risk on pricing as the CMA pointed out that the cost of arranging a funeral has risen more than two thirds in the past decade and almost three times the rate of inflation.

The CMA said that while some smaller funeral directors have sought to keep their prices low, other providers, in particular the larger chains, have implemented policies of consistently high year-on-year price increases.

"A number of these have now introduced lower cost funeral options, but this doesn’t go far enough to make up for years of above inflation price hikes," it said.

Peel Hunt said it was already concerned that price competition was becoming a way of life for Dignity rather than resulting in a short term re-basement of forecasts.

"However, the CMA’s language is significantly more strident than expected and includes crems as well as funerals. In addition, the spotlight is firmly on Dignity and the Co-op with the focus on the larger chains as well as reference to recent price cuts.

"The best case scenario is that the CMA just ends up asking for greater visibility on pricing. However, the tone of the statement suggests greater remedies will be required. This will put further pressure on pricing in funerals, but opens a new risk in crems. This is not a happy position for a business with net debt: EBITDA of 5.7x."

Peel Hunt said there no immediate risk on financing given that the company is well clear of covenants, but a further material reduction in profits will raise this as a concern.

At 1000 GMT, Dignity shares were down 16% to 847.62p.