September 21, 2022
Park Lawn Corporation
Nashville Bound! PLC investor day should provide clarity on path forward; tweaking forecasts, PT $44
Our view: Adjusting forecasts to reflect more conservative stance with respect to near-term mortality rates and cadence of recovery in pre-need sales, M&A. Investor event on September 29 should provide better clarity on the latter along with organic growth levers, opportunity to leverage FaCTS and the path to 2026 EBITDA target US$150 MM. Moderating target multiples to reflect 150 bps increase in our discount rate. PT to $44 (-$5).
Key points:
Forecasting EBITDA $19.1 MM (+2% Y/Y), in-line with consensus $18.8 MM (range $16.5-$21.5 MM) when PLC reports Q3 on November 9 (Exhibit 1). Assumptions underlying our Q3E incorporate modest sequential improvement over FQ2 reflecting corrective action taken June/ July to address unusual downturn in sales at certain cemeteries in April/ May. EBITDA margin pressure ~280 bps Y/Y to 22.7% reflects high fixed cost nature of the business and higher seasonal labour costs for cemetery maintenance against the backdrop of rising wages rates. Forecasts also reflect modest contribution from two acquisitions closed during Q3: Farris (early August) and Shackelford (early September), together contributing ~US$4.6 MM EBITDA annually. Opening of the Westminster Funeral, Visitation and Reception Centre in Toronto could provide upside as the company books previously contracted revenues.
Honky Tonk Women (and men): Investor day should provide clarity on path and cadence to US$150 MM EBITDA in 2026. We look forward to catching up with the senior management team in Music City where PLC has a substantial presence to better understand the operator-first mantra that drives organic growth, and to get an update on the M&A landscape, valuations and operator mindset coming out of the pandemic. We also look forward to early insights from the company’s proprietary information system (FaCTS) and potential longer-term contribution if PLC ultimately chooses to license the product.
Raising discount rate drives target to $44 (-$5) (Exhibits 6 & 7). We are raising the discount rate we apply to our ten-year target by 150 bps to 11.5% consistent with similar tweaks across our universe of coverage. Relative to other SMID-cap names in our universe, our revised discount rate is consistent with NBLY, another high-growth, roll-up story with a demographic tailwind, a premium to PET (9%) to reflect relative mix of organic vs M&A driven growth, and a modest discount to ATZ (12%) reflecting the latter's more discretionary positioning. We reiterate our favourable long-term view and recommend investors benchmark valuation against broader attributes, namely: i) defensive, relatively inelastic demand, ii) demonstrated resilience through downturns, iii) demographic tailwind, and iv) industry fragmentation with succession challenges.