Things are not getting any better for funeral parlour and crematoria owner Dignity (LON:DTY) as first quarter operating profit falls by two-fifths.

Peel Hunt has cut its 2019 pre-tax profit forecast from £44.5m to £41m. This is happening before the CMA enquiry is completed.

Declining death rate

The mild winter meant that the number of deaths in the first quarter was lower than normal. First quarter deaths were 12% lower at 159,000. Full year deaths are forecast to be down by 3% this year to 580,000.

Funerals profit slumped by one-third, due to price reductions, while crematoria profit fell by 16%. Higher marketing costs increased group overheads. Underlying operating profit declined from £37.5m to £21.7m.

The good news is that Dignity increased its funerals market share from 11.7% to 12%. However, the competition enquiry is still a concern and could further hamper profit even if market share grows.

Debt

There was no indication of debt levels in the trading statement. Net debt was £506.8m at the end of 2018. Dignity needs to make profit and generate cash in order to bring that figure down.

However, given the cost of the dividend, it will be difficult to make much of a dent in total debt. Dignity appears to be able to pay the interest charges and repay principal that is due on the secured notes. That is estimated to cost £33.2m a year, but net debt is set to remain high.

Valuation

At 661p, the shares are trading on ten times prospective 2019 earnings. Profit of around £23m is forecast for each of the next two years and the multiple is not much different. Assuming the dividend is maintained, the yield is 3.7%.

The rating does not appear high, but it is not likely to change significantly for the next three years.

The yield is attractive but could come under pressure if debt repayments are to be stepped up or the competition investigation leads to lower profit.

This is not a time to be buying the shares.