RBC
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Park Lawn Corp is “at an inflection point not fully recognized by investors,” according to RBC Dominion Securities analyst Irene Nattel, who thinks the Toronto-based funeral home operator has a path to achieving its earnings targets that “should not require incremental equity, which should in turn deliver rising returns to equity holders.”
In a research report released Tuesday, Ms. Nattel initiated coverage with an “outperform” rating, seeing a “credible” plan to achieve and even exceed its EBITDA run-rate target of $100-million by the end of 2022 through both M&A and organic growth.
“Our forecasts point to solid earnings growth over fiscal 2020 to 2022, with EBITDA CAGR [compound annual growth rate] of 17 per cent and EPS CAGR of 22 per cent, with
$65-million in annual M&A spend,” she said. “Although forecasts show slowing EBITDA growth relative to the F14-19 period (more than 60 per cent), accelerating EPS growth reflects moderating equity-capital requirements. Based on discussions with management, it is our view that investors have yet to fully recognize this critical shift and the concurrent benefit to equity holders. The caveat to our ‘no equity’ scenario would be sizeable M&A (i.e. above our upside scenario’s $150-million resulting in EBITDA/EPS growth in excess of 30 per cent/40 per cent), but the offset should be incremental EBITDA growth.”
Ms. Nattel said Park Lawn leads her coverage universe in potential earnings growth, seeing returns “accelerate meaningfully as the company pivots from equity-funded to self/credit-funded growth.”
Calling it an “attractively priced growth story supported by favourable demographic backdrop,” she set a $36 target for its shares. The average is $34.72.
“In our view, EBITDA valuation should be sustainable across our forecast horizon despite normalizing growth, as the higher base of earnings moderates relative contribution of goforward M&A,” said Ms. Nattel. “Our EBITDA target multiple of 13.5 times reflects: i) industry-leading EBITDA CAGR 17 per cent over our forecast horizon, ii) improving risk profile underpinned by a diversified base of business across North America and economic moat attributes, most notably relative exposure to cemetery services where significant barriers to entry exist, and iii) shift from equity-funded M&A to self-funding for all but sizeable transactions.”