November 11, 2022
Park Lawn Corporation
Polishing the forecasts: Fine-tuning near term expectations post Q3 call
Our view: Although normalizing death rates should continue to weigh on near-term performance, F23 should see results moving past COVID distortions, while PLC continues to execute on its M&A strategy, the primary driver of long-term value creation for shareholders. We reiterate our view that 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%. OP rating and $44 price target remain unchanged.
Key points:
Fine-tuning near-term model assumptions to incorporate insights from the Q3 conference call; Longer-term estimates largely unchanged: i) In light of ongoing weakness in death rates across the US and probable evolution of bulk pre-need sales over the next couple of quarters, we are moderating SSS for Q4/22 to -2.5% from +1%, Q1/23 to -1.0% from +1.0%, ii) Accordingly, given the high operating leverage of the business model, we are also taking down our margin expectations for the upcoming quarter, largely consistent with Q3 (22.6%), and iii) Finally, we incorporated NCIB execution during Q4 as PLC is likely to continue to opportunistically repurchase shares at current levels. Q3 details available in our note published earlier this week.
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.
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.
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 despite stronger FCF, B/S and earnings (exhibits 1-3). PLC on the RBC CM Small Cap Conviction List.