November 9, 2022
Park Lawn Corporation
Greener grass: Sequential improvement in operating trends
Our view: Although normalizing death rates continue to weigh on Y/Y performance, PLC Q3/22 results showed modest sequential improvement from Q2. As we move past the 2020/21 COVID distortions and PLC executes on its M&A strategy, the company appears on track to achieve its 5-year target of doubling EBITDA to US$150 MM, supported by annual M&A of US $75-125 MM, implying 5-year EBITDA CAGR of 15%. Reiterating OP rating, PT unchanged at $44.
Key points:
Green shoots: Q3 showed sequential improvement in organic performance and a step-up in M&A activity during and post-quarter, reinforcing our view of the company as a stable, defensive name with above-average (largely) self-funding M&A driven growth. Although actual results came in shy of forecast/close to consensus, in our view investors are likely to breathe a sigh of relief that PLC is on track to achieve its PF CAD $100 MM EBITDA target by year-end 2022, and building a strong base to achieve 5-year EBITDA target. Q3 revenue growth +10.7% driven by M&A, with comparable operations stable Y/Y. Revenue per call in comparable operations and call volumes both down modestly Y/Y due to lower death rates as we lap COVID peaks, offset by higher pre-need property sales as PLC moved quickly to address Q2 softness. Adj EBITDA $18.2 MM, -2.7% Y/Y, within forecast range $17-$19 MM. Adjusted EPS $0.22, -27%, magnified by dilution of Q3/21 equity raise of C$148.5 MM, methodically being deployed in M&A. Detailed results in exhibit 1, conference call 9:30 am ET, (877) 545-0320, Conf ID: 624678. Expect key discussion items to be: i) anticipated cadence of normalization of at-need sales, ii) current pre-need sales and initiatives to drive higher sustained levels, iii) update on M&A pipeline.
Pace of M&A accelerating in H2, as expected: YTD PLC has announced/ closed eight acquisitions. M&A $75-$125 MM/year targeting high growth markets is a key component of 2026 aspirational EBITDA target $150 MM.
Forecasts largely unchanged, with potential upside if PLC annual M&A is toward the middle/higher end of the annual $75-125 MM level. 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 @ Q3 of 1.49x/2.26x including debentures, undrawn balance of $106.5 MM on C$300 MM credit facility and cash on hand of $31 MM. NCIB likely to be more of an option as opposed to a reality for the foreseeable future.
Return to more favourable growth and more substantive M&A key to re- rating, in our view. Shares trading > 1 st. dev. below the 5-year average (Ex. 8) despite stronger FCF, B/S and earnings. PLC on the RBC CM Small Cap Conviction List.