Park Lawn Corporation
Tending the lawn: Reiterating constructive view, adjusting forecasts for shift to USD reporting
Our view: Forecasting EBITDA +15% to US$22 MM when PLC reports Q1/22 on May 12. EPS $0.34 (+7.5% Y/Y) reflects equity raise in Q3/21 and 14% increase in shares outstanding (Exhibit 1). Translating three other street estimates at the average Q1 CAD/USD rate suggests one estimate of US $0.19 and two estimates of US$0.32. Assumptions underlying our Q1E include contribution from prior period M&A and a modest 3.6% decline in SSS normalizing from 21.4% prior year (Exhibit 2) and reflecting a modest pullback in COVID-19 mortality across PLC’s US markets (Exhibits 3 & 4). Reiterating OP rating, target +$1 to C$54.
Key points:
Adjusting reporting currency from CAD to USD and tweaking the cadence of M&A in 2022. PLC is moving to USD reporting as of Q1/2022. Accordingly, we are translating our forecasts to USD in conjunction with this preview. We are also adjusting the cadence of M&A in 2022 to reflect one announced transaction Ytd, Chancellor Funeral Home and Garden of Memories in Mississippi (one stand-alone funeral home and one combination funeral home and cemetery property) that closed early Q2. While our model still assumes M&A in the range of US$105-100MM in 2022, we are shifting the bias to H2, resulting in a very modest decline in EBITDA and EPS forecasts for the year.
Potential upside to forecasts if M&A run rate to 2026 is toward the middle/higher end of stated US$75-125 MM annually. Our forecasts incorporate M&A of US$105-$110 MM in 2022, moderating thereafter to average US$65-75 MM to deliver just over US$150 MM EBITDA in 2026. Assuming PLC can continue to do M&A at the targeted average of 6-8x LTM EBITDA on larger transactions, there is arguably upside to forecasts if cadence is closer to mid-point or upper end of the range. Efficiencies from FaCTS proprietary software could drive modest upward bias to profitability and eventually a new revenue vector if deployed to third parties.
Balance sheet capacity to fund growth, potential for equity component largely depends on cadence/magnitude of transactions. EBITDA leverage 0.98x (1.78x including debentures) at the end of Q4 was well below covenants 3.75x and management’s comfort level up to 3.5x. Our model has leverage stable in the range of 2x, implying incremental balance sheet capacity of about 1.5 turns to fund growth over and above current assumptions. At stable cadence, PLC should be able to fund the growth from M&A without requiring incremental equity.
Reiterating Outperform rating, price target +$1 to $54. PLC valuation remains compelling, in our view, with shares trading at 11.8 our C22E EBITDA (Exhibit 7), below the industry average and SCI and at the low end of the five-year range, notwithstanding stronger FCF, B/S and earnings. More substantive M&A announcements could be a key catalysts for valuation re- rating, in our view. PLC is included on the RBC CM Small Cap Conviction List