Broker snap: Scope for acquisitions at Dignity

Panmure Gordon expects acquisition activity to re-emerge ahead of Dignity's third quarter statement, and retains its 'buy' recommendation for the funeral home operator.Despite traditionally being the quietest period in the year, the broker still expects to see year-on-year growth, forecasting revenues of £44m compared with £41.7m last year. Earnings before interest and tax is also expected to rise to £10.9m from £10.4 implying margins 10 basis points (one tenth of a percentage point) ahead of that last year."Dignity has now completed its re-capitalisation following the £72m issuance of bonds implying a cash return to shareholders of 100p," analyst Mike Allen said. "This was done on more conservative gearing levels than before leaving room for acquisitions as and when activity levels pick up," he added.The impact of the cash return on earnings per share expected for 2011 is more prevalent than 2010, at 3.6% higher, and 7.4% more estimated in 2012. "Clearly, acquisitions on top of this when they materialise should enhance these forecasts further", Allen said.At current levels, Dignity trades at 13.5 times the 2011 expected earnings per share falling to 11.8 times in 2012, which the broker believes looks attractive given the quality of its operation and shareholder value delivered to date".The broker remains comfortable with its target price of 872p, and with a 30% upside potential, it has re-iterated its 'buy' recommendation in anticipation of the statement on 5 November.