Defensive, cash generative Dignity has the expertise to deal with competitive threats.

Reports of the demise of Dignity (DTY) are exaggerated and a fierce share price sell-off of the UK’s second biggest funeral services and biggest private cremations provider is a buying opportunity.

We believe the share price weakness in this high quality, cash generative company, renowned for an unrelenting focus on customer service, is overdone.

A dependably solid third quarter update on 13 November revealed 5% underlying operating profit growth to £79.4m year-to-date. It also left full year guidance intact.

However, the statement confirmed the UK’s only listed funerals play continues to see rising competition in funerals and pre-arranged funeral plans.

These are high margin yet unregulated industries attracting new entrants. This is impacting Dignity’s funeral services pricing power, one of the key tenets of the industry consolidator’s bull case.

But under chief executive Mike McCollum, Dignity is pushing for the regulation of the funeral and pre-arranged funeral plan markets.

Hopefully, incoming regulation would stop funeral parlour operators that fail to provide minimum care standards from entering or participating in the market, while also squeezing out those who pursue aggressive funeral plan sales tactics.

Dignity still has attractive medium-to-long term opportunities to consolidate fragmented markets. Highly cash generative, Dignity is able to leverage its strong balance sheet to fund further acquisitions of established funeral businesses, or additional returns of capital to shareholders.

Crucially, it can reinvest the cash generated by the underlying business to regain market share.

Investment in its digital strategy is expected to cost £1m in full year 2017 and could rise in future years, though this looks a sensible spend to develop Dignity’s competitive position online. Dignity is also introducing new, more affordable services to appeal to more price sensitive customers.

As such, we believe Dignity, whose long-run track record of meeting or beating expectations is exceptional, can successfully fight back.

Dignity is still on course to deliver around 8% annual earnings per share (EPS) growth over the medium term, assuming normal mortality trends, despite the fact competition is intensifying.

Broker Panmure Gordon is a buyer with a £27.50 price target for Dignity implying 63% upside. For 2018 it forecasts £83.4m pre-tax profit (2017: £77.4m), rising to £89.9m in 2019.

Estimated 2018 EPS of 135.1p (2017: 123p) is forecast to rise to 145.7p in 2019, with the dividend progressing from 28.5p next year to 31.4p in 2019. (JC)

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