CIBCEQUITY RESEARCH
October 4, 2022 Company Update
PARK LAWN CORPORATION LIMITED
Operations Focus Underpins Growth Strategy
Our Conclusion
We had the pleasure of joining PLC management in Nashville last week for an Investor Day comprised of a management presentation, Q&A and site visits to two nearby locations. Representing the company were CEO Brad Green, CFO Dan Millet and a selection of senior executives and location operators acquired by PLC. The team provided a closer look at key operations aspects of the company’s long-term growth strategy. We maintain our view that PLC has the management expertise to execute on acquisition and organic growth opportunities, underpinned by aging demographics and supported by a stable balance sheet. Our C$36.00 price target and Outperformer rating are unchanged.
Key Points
The current state of the industry – notably, the substantial decline in the
number of mortalities due to COVID-19 pull forward as well as PLC’s sales challenges - are well known and (overly, we think) reflected in the share price. These are short-term headwinds that do not bear on PLC’s significant long-term growth opportunities. See our recent report (“This Too Shall Pass”) for a discussion of major current issues and management’s mitigation strategies.
Operations Focus Ties In With Acquisition Strategy: While acquisitions
will continue to comprise the larger part of growth (contributing ~70%), PLC’s strategy is based on an “operators first” approach. As operations touches everything, this approach guides the company in executing its acquisition strategy. Acquired firms all possess sound assets and management; PLC’s value-add includes centralized back-end support (e.g., human resources, accounting, payroll, IT, legal) that allows acquired operators to focus on sales and deathcare functions. In contrast, the operating models of Service Corp. International (SCI US) and Carriage Services (SVG US) involve greater and lesser degrees of centralization, respectively.
Buying Good Businesses & Making Them Better: PLC continues to target
$75MM-$125MM of annual deals (though this will be naturally lumpy,
depending on availability and market conditions), in both existing regional
markets and those with strong growth potential. Regional demographics form a key consideration. Management anticipates an acceleration of deal activity, as the company leverages a pipeline built primarily through broker contacts and word-of-mouth; management also notes that private equity recycling may be on the rise. CEO Brad Green and COO Jay Dodds visit viable acquisition targets to meet the owners and employees. In addition, they identify key operating personnel, even if they are not the owners or current operational leaders, in order to optimize financial performance.
Valuation Is Attractive: PLC trades at 8.0x EV/EBITDA on our 2023E vs.
Service Corp. (SCI US) at 11.3x consensus.