Park Lawn Corporation
Weeds: Q2 results well below forecast, over time normalization and M&A should deliver growth
Our view: PLC delivered an unusually soft quarter as lower mortality rates negatively impacted the cemetery segment. Despite the disappointing Q2 print, in our view mortality rates will inevitably normalize, which combined with successful execution of PLC's M&A strategy, should enable the Company to achieve its 5-year target of doubling EBITDA to US$150 MM, supported by annual acquisition activity of US$75-125 MM, implying 5-year EBITDA CAGR of 15%. Reiterating OP rating, PT to $49 (-$1).
Key points:
An unusual stumble: After a strong start to F22, results sharply reversed in Q2, with revenue growth only +5.4% to $76 MM, vs forecasted growth 18.5%, driven by acquisitions that added $9.6 MM to revenues, more than offsetting $5 MM (-7.4%) decline from comparable operation due to lower property sales in certain cemetery segments (-21.8%). Revenue per call in comparable operations +2.1%, offset by call volumes -3.3%, higher cremation rates (+163 bps). Adjusted EBITDA $15.6 MM, -16% Y/Y, well below forecast/consensus $21-22 MM, margin 20.6% vs target 25.5%. Adjusted EPS $0.19 vs $0.29 in Q2/21, forecast/consensus $0.30-$0.33, moderated by dilution of Q3/21 equity raise of C$148.5 MM, slowly being deployed in M&A. YTD PLC has completed three acquisitions, with a fourth, larger transaction scheduled to close in September.
Expect pace of M&A to pick up as we move through H2/22. M&A $75- $125 MM/year targeting high growth markets is a key component of 2026 aspirational EBITDA target $150 MM. Organic drivers back-end loaded and include: i) operational improvements, ii) efficiencies of proprietary software, and iii) development opportunities at existing properties.
Moderating near-term forecasts, medium term unchanged with potential upside if PLC annual M&A is toward the middle/higher end of the annual $75-125 MM level. We had incorporated $105 MM in M&A in 2022 to reflect the Q3/21 equity offering, based on cadence YTD, a portion will likely shift to 2023. 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. PLC well positioned to fund growth with EBITDA leverage 1.09x/1.95x including debentures, undrawn balance of $149.5 MM on C$300 MM credit facility and cash on hand of $21 MM.
Announced NCIB for up to 10% of float (3.4 MM) with ASPP. Our model does not currently factor any share repurchases before F24.
Return to more favourable growth and more substantive M&A key to re- rating, in our view. Shares trading at 11.3x our C22E EBITDA, at the low end of the five-year range, notwithstanding stronger FCF, B/S and earnings. PLC is included on the RBC CM Small Cap Conviction List.