Dignity PLC

The Basics

Established in 1812, Dignity is the only nationwide, vertically integrated end-of-life business. It currently has c.800 branches across the country, 500 trading names and 46 crematoria.

Castelnau Group holds a controlling stake in Dignity PLC, which remains listed on the London Stock Exchange.

The Story

Dignity has been the victim of poor management and a short-term strategy that exploited customer goodwill by increasing prices faster than volume losses, without any discernible improvement in the quality of the offering. This led to a loss of competitiveness. Low industry barriers to entry meant that new competitors emerged, market share losses ensued and return on core capital declined.

A CMA investigation was also launched around the same time, (which ultimately concluded that price rises were egregious) and the share price collapsed. In early 2018 Phoenix saw an opportunity to invest in a great business at an attractive price.

The investment manager’s stake and involvement in the business grew over the forthcoming years. This culminated in Phoenix raising an EGM early 2021 due to serious concerns surrounding Dignity’s Funeral Plan division as well as the wider business strategy. The outcome of this was that Gary Channon became Executive Chairman of Dignity and Phoenix now have full control of the business.

The Vision

The investment manager’s vision is to make Dignity the UK’s leading end-of-life business, renowned for its excellence, represented and embedded in the community with strong local brands, offering the best service for the best prices. The upside to getting this right is substantial value creation.

There are three core components to the Dignity business; Funeral Plans, Funerals and Cremations. We intend to grow in all areas.

There is significant opportunity to grow Dignity Funeral Plans, by (1) expanding the market and (2) taking more share within that market. Only c.8% of over 50’s in the UK have a funeral plan (in the Netherlands c.60% of the adult population has a plan) and Dignity has just 21% of undrawn plans.

Not only do funeral plans lock in future business for Dignity, but that money goes into the Trust where we have the opportunity to build and grow the surplus. The value of this surplus is available to shareholders. Combining better management of the float with the fact that funeral prices are likely to trend down, means we expect the surplus to become a meaningful contributor to future value. 3% outperformance is a very achievable target and would generate an additional £30m each year (on a Trust of £1bn).

Within the At-Need Funerals segment, we intend to use a combination of competitive pricing, mix, investment in the estate, cultural transformation and local branding to win back local market share. We aspire to 20% funerals market share in 10 years time (currently we are at c.11%).

We have some fantastic, high return on capital assets within the crematoria division. We intend to create value by building out our pipeline of crematoria and improving the yield on each crematorium. We currently have 46 crematoria, have planning permission for another 6 and aim to build an additional crematorium each year for the next decade. We will improve yield by (1) increasing throughput, by embracing the lower priced Direct Cremations and increasing capacity at peak hours (through use of service chapels) and (2) by selling more ancillaries at each crematorium, through catering and memorial sales.

Underpinning all of this is a cultural transformation. We intend to move from a command and control, hierarchical culture, to an inverted organisation (pioneered by the likes of Nordstrom and Timpson) that empowers front line colleagues and gives them far greater autonomy of decision making. Ultimately, we want our colleagues to be empowered to do whatever it takes to best serve the customer; providing exceptional service will be fundamental to our future success.

If all of the above is done well (and that is no easy feat), we have the potential for what Charlie Munger calls a lollapalooza effect, where several things come together to have a exaggerated impact on value. We have a wide range of outcomes but think the intrinsic value of Dignity could be anywhere between £30 to £100.