Park Lawn Corporation
Pruning the hedges: Fine-tuning estimates ahead of Q1 results
Our view: Fine-tuning Q1/F23E, with Y/Y decline reflecting normalizing death rate and cost pressures. While Q-to-Q visibility is inherently muddled in this sector, 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) substantial M&A opportunity. Reiterating OP rating, $41 PT.
Key points:
Moderating Q1/F23E, long-term outlook constructive and unchanged.
Forecasting EBITDA $20.1 MM (-6.0% Y/Y), in line with consensus (range $18.9-$21.3 MM) when PLC reports Q1 on May 11 (Exhibit 1). While normalizing death rates from pandemic highs continue to muddle near- term visibility, COVID distortions should ease as we move through 2023.
Our revised Q1E EBITDA (-$1 MM) is down Y/Y due to: i) expectation of lower death rate in Q1 reflecting easing of COVID-related contracts; ii) timing of pre-need cemetery sales; iii) 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 Q1E to 22.8% reflects high fixed cost business.
H2/22 M&A momentum continuing into 2023. Latest acquisitions announced February and March broadens presence in the Midwest with a total of eight stand-alone funeral homes and one stand-alone cemetery. Together these acquisitions are expected to contribute EBITDA US$4.1 MM annually or 5.5% of TTM once fully integrated. With a solid start to 2023 M&A, we reiterate our view that M&A assumption $60-$65 MM underlying our F23E model is conservative, particularly when compared to F22A $94 MM, F21A $126 MM and stated target range $75-$125 MM/annually.
Notwithstanding margin headwinds in 2023, rollout of FaCTS and benefits of scaling should reconstitute margins over time, with torque from high fixed cost inherent in the business. Organic growth outlook further underpinned by maturation of 2021 and 2022 M&A, contribution of Westminster Funeral & Reception Centre in Toronto (August 2022) and opening of Waco Memorial Funeral Home (March 2023).
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 and B/S, but near-term visibility muddled by transient elements, notably: i) moderating death rate post-COVID impacting at-need demand; ii) tighter consumer spending impacting pre-need sales; and iii) high fixed cost business impacting operating leverage. PLC is included in the Canadian Small Cap Conviction List.