Park Lawn Corporation
Lawn care: Management meetings reinforce our constructive view
Our view: Meetings with PLC management reinforce our constructive view as our investment thesis plays out as anticipated: solid underlying organic growth augmented by M&A contribution, and modest pandemic- related lift in both pre-need call volume and at-need demand. Outperform rating predicated on sector-leading earnings growth, and underpinned by favorable demographic trends and a long tail of consolidation opportunities.
Key points:
Firm operators at the helm. As self-described operators who acquire and integrate smaller independents, focus is solidly and strongly on operating efficiency at the business level and benefits of scaling on a consolidated level to drive sustainable margin expansion. Yes, call volume may moderate as we move past pandemic-related at-need demand, but accelerating average revenue per call should sustain solid comps as bereaved families return to honor loved ones with intended traditions disrupted during the crisis. Pull-forward of demand in regions where PLC operates was far more modest than what has been reported by peers, implying similarly modest comp headwind as the backdrop normalizes.
Executing on successful M&A playbook, with a dual focus on i) in-filling existing markets with highly accretive tuck-in acquisitions that typically transact at lower multiples and can be integrated quickly, and ii) gaining a foothold in new markets with larger transactions. Current mix of business is roughly evenly split between funeral homes and cemeteries, and the company is agnostic between the two, with capital allocated to "highest and best use" opportunities.
Mindful of capital structure and allocation, with more focus on ROIC. With leverage ratio 2.6x including recent hybrid debentures, 1.5x ex-debentures (excluded from covenant measure), we believe and management has indicated that PLC is on the cusp, but not entirely there yet, of self-funding operations and sustaining the pace of M&A with internally generated FCF and debt. Accelerating M&A volume or deal size could require incremental equity given the steepness of the current growth curve, but management is highly focussed on returns with variable compensation tied in part to return metrics.
Getting and sharing the FaCTS: proprietary software on track for year-end deployment in the US. The system should improve back office efficiency of operating and corporate businesses and provide better operating and financial metrics to improve efficiencies and enhance external disclosures. Financial performance, robust M&A pipeline, strong focus on operations should put PLC on track to achieve corporate goal to deliver $100 MM EBITDA ahead of targeted Q4/F22. Estimated current pro forma EBITDA run rate $92 MM should put PLC on track to achieve the stated run-rate later in 2021. Against this backdrop, management could issue updated targets sometime in early 2022.
PLC is included on the RBC CM Small Cap Conviction List.