CIBC UpgradeEQUITY RESEARCH
January 20, 2022 Earnings Update
PARK LAWN CORPORATION LIMITED
Fireside Takeaways: Operations Solid, Larger Deals Ahead?
Our Conclusion
We had the pleasure of hosting PLC CEO Brad Green, President/COO Jay Dodds and CFO Daniel Millett for a virtual fireside chat at CIBC’s 25th
Annual Western Institutional Investor Conference. Our key takeaways are as follows: 1) PLC continues to perform well through the pandemic challenges; 2) PLC remains in a strong position to acquire quality businesses – this may include larger deals; and 3) ESG will continue to grow as a company focus. As we roll out our 2023 estimates, we are raising our price target from $45.00 to $48.00 (now based on 2023E). PLC remains Outperformer rated.
Key Points
Robust Revenue Drivers; Inflation Shouldn’t Slow Momentum: Pre-need sales have remained strong, customer demand for memorialization services has returned sharply and the cremation rate has not risen through the pandemic. The margin expansion program for legacy acquisitions (those acquired before the current management team took control in early 2020) is essentially stabilized; recent acquisitions have come with higher initial margin profiles. Inflation hasn’t been a major issue thus far; wages have remained stable (employee turnover has not been significant) and PLC has long-term product supplier agreements; however, it will become a larger factor over the next 6-12 months with wage increases and supplier contract roll-over. Management expects to pass on higher costs, a reflection of its sound, mid- price point, high value-for-service proposition.
Acquisition Activity Remains Elevated: PLC continues to field high
volumes of inbound inquiries from potential vendors. Management expects
selling interest to remain high, as the challenges of operating during the
pandemic continue to bring forward succession planning; to this point, the
first focus of the acquisition process is understanding owners’ motivations to sell. Though the acquisition environment remains very competitive,
management believes PLC can easily do $100 million-$150 million of annual deals; the major constraints are time and internal resources, rather than capital or number of opportunities. Management expects to continue doing small- and medium-sized deals. It could also envision doing a transaction large enough to “alter the base of the company”; management has said in the past that for the right deal it would be comfortable levering up (~3x or more), to be paid down from cash flow. For illustrative purposes, we provide snapshots of three privately-owned death care networks below.
ESG Growing In Focus: This has become a more important issue since the current management team took over, starting with governance (including separating the Chairperson/CEO roles and instituting an investment committee to oversee administration of trust funds). Environmental initiatives include the use of electric mowers, energy-efficient lighting and metals recycling (with proceeds donated to local charities); also of importance is the fact that PLC is the owner of large green spaces (i.e., cemeteries).