Dignity: Death is certain, pricing power is not, Berenberg says

Berenberg took an axe to its target price for Dignity, telling clients it is waiting to see how the firm responds to the competitive threat to its pricing power from new entrants into the market.

In a nutshell, death may be a certainty but sustained pricing power is not, the German broker said.

Unfortunately, the broker's investment case for the shares was predicated on the company's long-term growth potential which in part relied on its ability to continue being a price-setter, as opposed to a price-taker.

So for the time being, its analysts lowered their target price from 2,950p to 2,350p and downgraded their recommendation from 'buy' to 'hold'.

Nonetheless, the company's track record in delivering or beating consensus expectations was "strong", Berenberg said, and its delivery since IPO "exceptional".

Indeed, the analysts were very confident of Dignity's ability to meet or beat consensus in both fiscal year 2017 and 2018.

However, competition was building as the firm's 'good fortunes' were attracting competitors.

"Increasing competition means that the company’s ability to continue raising prices at 5-6% pa looks uncertain. With management now examining various new pricing and service options, we see a risk that it is forced to moderate its pricing to chase lower-margin business. As a result, we reduce our long-run margin assumptions."

"Consequently, we feel the current multiple fairly reflects Dignity’s lower growth profile and limited scope for earnings upgrades."