CIBCHave a $29.00 target. GLTA
EQUITY RESEARCH
September 7, 2023 Flash Research
PARK LAWN CORP. Gathering Here Today: Park Lawn’s Toronto Tour
Our Take: Park Lawn’s site tour demonstrated the ability to manage internal
capital projects to generate organic growth, and also the ease of executing
and integrating some acquisitions. These are important positive attributes
that will be needed to offset what we see as two primary factors holding back
the stock. The first involves cautious consumers, who may be reticent to
spend on pre-need services (over half of revenue). The second concerns the
lingering impact of excess deaths from 2020-2022, suppressing the near-
term mortality rate, which was down ~8% Y/Y in July (though data can still be
revised upward). PLC’s valuation has become more compelling, at 8.8x
EBITDA, ~14.5x EPS, and an FCF yield near 7% (all on NTM), versus recent
averages of 11.5x, 22x and 4.5%, respectively.
What Happened: Park Lawn management provided investors with a tour of
two Toronto locations. These included Westminster Cemetery & Mausoleum,
a flagship property and the company’s first Canadian on-site location; and
also Ward Funeral Home Limited, a recent Canadian acquisition (C$9.5MM
annual sales, and we estimate C$2.4MM in EBITDA and an acquisition cost
of C$18MM) which includes three funeral homes based in Toronto.
Plug & Play M&A: The Ward acquisition was completed just two months
ago, but it appeared as if the parties had been working together for some
time. Park Lawn’s approach of leaving alone front-of-house operations, and
improving back-of-house (data analytics, IT services, buying power) allows
for simple and quick integration. We believe this supports not only the overall
roll-up strategy, but also PLC’s view that it can acquire assets despite not
being the highest bidder.
Internal Growth Opportunities: An important element of organic growth at
Park Lawn involves productivity of limited real estate, and assessment of
best use given various restrictions. The ability to generate organic growth
was on display at Westminster, where an expansion project will increase the
number of crypts by nearly 50%. Management targets a 20% levered return
on internal projects, but Westminster (construction began in 2020) has been
quite successful, earning closer to 20% on an unlevered basis despite
completion costs well above typical levels.
Acquisitions Since Our Last Note: Since our last published note on
August 13, Park Lawn announced two acquisitions, which combined are
estimated to add ~0.8% to 2023E EBITDA at an estimated combined cost of
$5.1MM. First, on August 14, PLC acquired Forrest & Taylor Funeral Home
Limited, which includes one standalone funeral home in Sutton, Ontario
which is expected to generate C$338K in EBITDA. Second, on August 30,
PLC announced a deal to acquire Christy-Smith Funeral Homes, which
includes two standalone funeral homes in Sioux City, Iowa, expected to close
mid-October. Christy-Smith is expected to add $438K in EBITDA.