Park Lawn Corporation
Trimming the hedges: Moderating NT forecasts, reiterating constructive view ahead of FQ3
Our view: While we are revising downward our expectations around at-need volumes for the next few quarters, i) higher pre-need sales, ii) increasing revenue per call, and iii) underlying margin improvements should largely offset the impact of normalizing call volumes. But more importantly, based on our analysis, PLC has significant dry powder to be redeployed on a robust M&A pipeline at attractive valuations, well below implied multiple on PLC's stock, driving net value accretion to shareholders. Outperform rating predicated on sector-leading earnings growth, and underpinned by favorable demographic trends and a long tail of consolidation opportunities. Reiterating $50 target.
Key points:
Reducing near-term estimates, but constructive long-term outlook remains intact underpinned by favourable demographic trends and a sizeable consolidation opportunity.
• Organic revenue growth: While rev/call trends remain quite favourable, we are moderating expectations around near-term death rates in light of behavioural changes/vaccine uptake in the US. EBITDA margins also revised downward on lower overhead absorption. However, our medium-term SSS forecasts are unchanged, with upside risks from a potentially strong flu/influenza season next year on the back of potential aggregate immune system weakness/fatigue. Update around weighted- average COVID-related deaths in PLC's markets in exhibits 2-3.
•Capital deployment: We are spreading out "elevated" capital deployment towards acquisitions from the recent share offering over the next 5 quarters (~$37.5MM/Q), a slightly longer reinvestment horizon than previously incorporated in our model (3 quarters @ ~$50MM/Q).
• Q3E: Forecasting EBITDA $22.2MM (+16% Y/Y), reflecting: SSS ex-FX -1.3%; revenue +9.6% Y/Y on M&A; EBITDA margin 24.4%. Details in exhibit 1.
Recent capital raise and anticipated redeployment towards M&A should drive net value accretion to PLC shareholders, reiterating $50 target.
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Share offering added dry powder to an already clean B/S, implies M&A above expectations going into 2021. We take a positive view of the incremental M&A funding and see it as a tangible sign of the robust pipeline. We remain confident in management's ability to capitalize on the meaningful valuation delta between its currency and typical industry takeout multiples (6-9x), remaining disciplined on price while improving acquired operations over time, and surfacing value for S/H.
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Attractive valuation on both absolute and relative basis. PLC valuation remains compelling, in our view, with shares trading <12x our normalized C22E EBITDA, and towards the lower end of its historical trading range. The stock also appears attractive relative to higher growth SMID cap names, and in historical context relative to SCI, N.A. discretionary and staples names. Details in exhibits 5-7.
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PLC is included on the RBCCM Small Cap Conviction List.