Market leader well prepared to grow into new markets
NIRVANA Asia Ltd, the largest integrated death care service provider in Asia, is on the right path to successfully execute its expansion plans within its existing markets and beyond.
UBS Securities Malaysia Sdn Bhd in a recent report believes the company has the advantage of being a market leader in its existing markets, as well as a proven track record.
On top of that, Nirvana’s founder Datuk Kong Hon Kong has more than 20 years of experience in the death care industry and has been key to the company’s earlier ventures into other markets.
“This includes the successful entry into Indonesia and Singapore. As such, we believe Kong and his team are well prepared to grow beyond its existing markets,” says UBS analyst Edwin Siow in a recent note.
Nirvana has kept its focus in the pre-need market, which refers to the ethnic Chinese population over 40 years of age.
It has more than 31,000 burial plots for which tomb arrangements have not been made. This implies impending revenue of US$636mil to be realised. The company has previously sold more than 151,000 burial plots and niches to customers who have yet to purchase funeral service packages.
Siow says this could potentially generate US$906mil, based on the prevailing average selling price of US$6,000 for funeral packages. Separately, pre-need funeral services account for US$104.4mil of future revenue, to be recognised when the services are rendered.
Nirvana’s focus on the pre-need segment allows it to lock-in future revenue. “This enables Nirvana to grow at a quicker pace organically, without being constrained by the growth of the as-need market, which moves in tandem with the natural rate of death,” he adds.
UBS forecasts Nirvana’s net profit to grow 24%, 24% and 20% for the financial years ending Dec 31, 2014, 2015 and 2016 respectively. While it expects the group’s commencement of operations in Thailand and Indonesia to contribute to boost Nirvana’s earnings in 2015, UBS believes the increase will be tempered by the translational impact from a depreciating ringgit.
UBS expects the group’s earnings before interest, tax, depreciation and amortisation (Ebitda) to decline by 13.1% in 2014 largely due to the employee share option scheme introduced in 2014, and expenses related to the listing.
At current levels, the stock remains attractive as it is trading at a significant discount to global peers.
This is in line with what founder, chief executive officer and managing director Datuk Kong Hon Kong previously noted, that current valuations provide an opportunity for investors to accumulate the shares.
Since listing on Dec 17 last year at HK$3, Nirvana shares have taken a 22.7% cut to HK$2.32 as at yesterday.
“We think this is unjustified as Nirvana’s 2015 and 2016 net profit growth of 24% and 20% is comparable if not superior to its regional peers (based on consensus estimates): Fu Shou Yuan, Lung Yen and Invocare,” Siow says.
In its upside scenario, UBS assumes higher medium/longer term contract sales of 9% and 7.5%, compared with its base case of 8% and 5.5% respectively, on better-than-expected sales in the new locations.
“Additionally, we estimate further cost efficiencies through a 1 percentage point reduction to the commission rate. In this scenario, we estimate a valuation of HK$4.20 per share,” Siow says.
However, he adds that the downside risk to Nirvana’s valuation is the persistence of weak market sentiment on the sector and market. “In our downside scenario, we assume the market values the company’s 2015 earnings at 10 times PE,” he adds.
“We believe the upcoming results announcements in February 2015 and May 2015 should provide assurance on the company’s operational capabilities, particularly in an overall weak market environment,” he says.
Siow also expects potential merger and acquisition developments to materialise from some of its existing MoUs to be a positive driver for the stock.
Moving forward, he expects Malaysia to remain the key driver to Nirvana’s earnings.
Siow expects Nirvana’s revenue to be driven by the burial services segment, particularly niche products. “We expect the commencement of the columbarium in Kuala Lumpur in 2016 to be a key driver for the sales of its niches. This is in view of the favourable location, which is close to the city centre, providing easy access to potential customers. Additionally, we expect an increase in the company’s average selling price of niches in view of the KL location,” he adds.
He reiterates that Nirvana’s strengths lie in its entrepreneurial management team, effective agency force and strong brand recognition in Malaysia and Singapore. He also expects the group to extend its dominance in those countries while enlarging its regional footprint over the next three years.
“We believe the successful implementation of Nirvana’s regional expansion initiatives will be a key driver for this stock,” Siow adds.
Nirvana increased its agency force from 2,682 active agents in 2011 to 3,022 in 2013. This enables the company to reach a wider market than its competitors.
“The agency model creates a competitive edge, in our view, allowing the company to reach a wider market and cross-sell its products better than its peers. This has been effective, given Nirvana’s extensive range of products and services, locations and high level of personalisation,” he says.
As at January 2015, the company has 10 cemeteries, 12 columbarium facilities and two funeral homes in the region.
UBS expects the death care sector to remain resilient particularly in the as-need market where demand is inelastic. “The commercial pre-need penetration rates in Malaysia, Singapore and Indonesia remained low at 5.8%, 1.9% and 0.8% respectively in 2013. As the markets mature with a greater acceptance of the pre-planning concept, we expect the death care sector to grow in tandem,” Siow adds.
However, risks to Nirvana’s operations include regulatory changes in existing and new markets, as well as contractual litigation especially in new brownfield investments, increased competition and an inability to penetrate new markets.
The company recently signed a binding cooperation agreement with Huizhou Longyan Art Cemetery Development Co Ltd that grants Nirvana exclusive rights to provide services to Huizhou Longyan for 10 years.
This is in relation to the management, operation and sales of not less than 30,000 double niches in its columbarium facilities known as the “Longyan Main Tower” in the Huiyang District, Huizhou City in China’s Guangdong Province.
The agreement is effective as at Feb 2 and would automatically be extended for five years if any of the niches remain unsold upon expiry of the 10-year term.
Huizhou Longyan will also grant a non-exclusive right to the group to provide services in relation to the sales of other death care products and facilities of Huizhou Longyan.
This marks Nirvana’s first step into the China’s death care service market.
“We will continue to seize various opportunities. By leveraging on the group’s in-depth industry experience and brand recognition, we aim to further solidify our leading position in the industry by replicating our success in new markets, and bring our investors satisfactory returns,” he said in a statement on Thursday.
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