Park Lawn Corporation
Tending the lawn: Moderating forecasts ahead of Q4, price target to $41
Our view: Moderating forecasts ahead of Q4 to reflect normalizing death rate, moderating group sales and rising cost pressures, partly offset by effective pricing power, gradual improvement in pre-need sales and ongoing execution of M&A strategy. While Q-to-Q visibility is muddled, we reiterate our favourable long-term view and recommend investors benchmark valuation against broader attributes, namely: i) defensive, relatively inelastic demand, ii) demonstrated resilience through downturns, iii) demographic tailwind, and iv) industry fragmentation with succession challenges. Reiterating OP rating, PT to $41 (-$3).
Key points:
Moderating near-term estimates, long-term outlook largely unchanged.
Forecasting Q4 EBITDA $19.4 MM (-2.7% Y/Y), broadly in line with consensus $18.7 MM (range $17.5-$19.9 MM) when PLC reports Q4 on March 2 (Ex. 1). While normalizing death rates continue to muddle near- term visibility, COVID distortions should ease as we move through 2023.
At this time, we are moderating earnings growth forecasts to reflect: i) lower overall death rate in Q4 reflecting easing of COVID-related contracts, ii) normalizing group sales sequentially in Q4, iii) tough comp on call volumes notably for Q1/23, exacerbated this year by tight consumer spending, iv) operating cost increases reflecting growth of the business, inflationary pressures and IT support and training related to FaCTS rollout, partly offset by i) pricing, and ii) cost management. EBITDA margin pressure -290 bps Y/Y in Q4E to 22.4% reflects high fixed cost business.
M&A continues apace and remains the primary engine of long-term value creation. Latest acquisition announced early February and expected to close in April, broadens presence in Kansas City Metropolitan Area with three stand-alone funeral homes and one stand-alone cemetery. EBITDA contribution anticipated to be US$2.2 MM or ~3% of TTM once fully integrated. Our F23 M&A assumption $60-$65 MM is conservatively below stated target range $75-$125 MM/year, rising to ~$90 MM in F24.
Potential upside if annual M&A is toward the middle/higher end of the annual $75-125 MM level. Assuming PLC can continue to do M&A at the targeted average of 6-8x LTM EBITDA on larger transactions, there is arguably upside to forecasts if cadence is closer to mid-point or upper end of the range. PLC well positioned to fund growth with EBITDA leverage @ Q3 of 1.49x/2.26x including debentures, undrawn balance of $106.5 MM on C$300 MM credit facility and cash on hand of $31 MM.
Return to more favourable growth and more substantive M&A key to re- rating, in our view. Shares trading > 1 st. dev. below the 5-year average despite stronger FCF, B/S and earnings (Ex. 7-9). PLC on the RBC CM Small Cap Conviction List.