Park Lawn Corp.
(PLC-T) C$36.50
Resuming Coverage; Cashed Up to Execute on the M&A Pipeline Event
We are resuming coverage following the closing of PLC's $148.5mm equity financing. PLC issued 4.081mm shares (~14% increase in the share count) at a price of $36.40/share.
Impact: NEUTRAL
PLC intends to use the proceeds to pay down its revolver to free up capacity for future acquisitions and organic growth initiatives. In our view, the deal was somewhat of a surprise as management had seemingly been priming the market for higher run-rate leverage levels, above the prior management team's target range of 2.0-2.5x ND/ EBITDA. However, with PLC shares up ~34% YTD and trading at an all-time high, we believe management acted opportunistically to shore up its liquidity to capitalize on the current robust acquisition pipeline. We view this as a prudent strategy, particularly given the relatively limited competition for acquisitions currently, which is keeping valuations in check and allowing PLC to be selective.
In H1/21 PLC deployed US$75mm (C$93.75mm) on acquisitions, with management highlighting during Q2/21 earnings that it would likely be active across the remainder of the year, with sellers effectively lining up for discussions. We believe that PLC is quickly becoming the acquirer of choice in the U.S. given its partnership approach and focus on continuing the legacy of acquired locations in their respective communities.
We have updated our model to reflect the equity financing, with the share dilution somewhat offset by lower interest (Exhibit 3). Although we do not model unknown acquisitions, we anticipate that management will be quick to deploy the capital and offset the share dilution. Based on our estimates, we calculate pro-forma leverage of ~1.4x, down from 2.8x as at Q2/21 (including the recent Nashville/Mississippi acquisitions), leaving the door open for potential larger transactions. Assuming an acquisition multiple of 8.0x EBITDA, we estimate that PLC now has capacity to acquire ~$20-25mm of EBITDA without exceeding 2.5x leverage.
TD Investment Conclusion
We are reiterating our BUY recommendation. Our target price remains unchanged with the share dilution offset by a greater contribution from acquisitions. We continue to view Park Lawn as a high-quality company in a recession-resistant business with a favourable industry backdrop (including demographic tailwinds) and ample opportunities/capacity to grow through M&A.