Grass is greener: PLC Q1/21 results strong and better than expected, target to $43
Our view: Our investment thesis on PLC is playing out as anticipated, with solid underlying organic growth augmented by M&A contribution, and transient pandemic-related lift in both pre-need call volume and at- need demand. Strong Q1/21 results reinforce our constructive view on the stock, with our Outperform rating predicated on sector-leading earnings growth, and underpinned by favorable demographic trends and a long tail of consolidation opportunities. Target to $43 (+$4).
Key points:
Tweaking forecast to reflect both Q1 results and progress on margins.
Incorporating strong Q1 results into our model and raising our EBITDA margin forecasts drives EPS +6% in 2021E and +10% in 2022E. While incremental volume associated with the pandemic is driving scaling and fixed cost leverage, arguably the underlying trend is also progressing better than plan, with solid integration synergies and a sharp focus on operations boosting profitability. While a change in financial reporting to align with publicly traded peers is resulting in higher reported margins, our analysis points to accelerating underlying profitability driven by operating leverage and scaling.
Strong operators at the helm. CEO Brad Green and President & COO Jay Dodds both have long tenure as industry operators but only took over in the c-suite at PLC in the past year. Green and Dodds brought with them a strong culture of operating excellence, which is now spreading across the organization. Against this backdrop and with record-setting profitability in Q1, we have greater confidence in PLC’s ability to achieve margin upside over our forecast horizon. Last quarter, we had highlighted upside bias in our EBITDA margin forecast towards 26% in 2022. Given Q4/Q1 results, our revised model currently assumes PLC approaches that level in 2021.
Year-end leverage ratio of 1.23x reinforces solid CF generation and healthy balance sheet. Leverage ratio 1.23x at March 31 (-0.32x) and coverage ratio of 16.8x prior to closing of three relatively small transactions reinforces our view that PLC has reached an inflection point, with a path to achieving earnings targets without requiring incremental equity, delivering rising returns to shareholders.
In our view, recent performance puts PLC on track to exceed corporate goal to deliver $100 MM EBITDA run rate by Q4/F22. With just under two years to go in the plan horizon, LTM EBITDA is about $12 MM shy of target, excluding pro forma contribution from recent acquisitions totaling in excess of $4 MM. With a transient step-up in the death rate, accelerating call volumes and pre-need sales, efficiency gains and synergies from acquisition integration and a strong pipeline of potential M&A, in our view, the stated target is best characterized as a floor, not a ceiling. We reiterate our Outperform rating and raise our price target to $43 (+$4). PLC is included on the RBC CM Small Cap Conviction List.