Park Lawn Corp.
(PLC-T) C$26.46
Solid Results; PLC Stick-handling the Tougher Environment Well Event
We are updating our estimates following the release of PLC's Q1/23 results. Adj. EBITDA of $20.5mm was in line with TD/Cons at $20.1mm. See First Look Here.
Impact: POSITIVE
Q1/23 results were largely in-line, with PLC doing a good job navigating the tough COVID-19-impacted comparison (this was the last of the exceedingly tough comps). Consolidated Q1/23 revenue increased 4.3% y/y to $86.7mm, reflecting recent acquisitions, partially offset by -5.6% organic sales (slightly below TD's -5.0% estimate). The negative organic sales reflect an 11.3% decline in funeral home call volumes, partially offset by a 1.5% price increase and increased merchandise/services sales. The decline in call volumes reflects a normalizing death rate post COVID-19, with the CDC reporting U.S. deaths down ~14% y/y.
Investor perceptions have been somewhat anchored to the view that PLC (and the broader death-care industry) was over-earning during the pandemic and that a significant deterioration in results is looming. No question results have been much more challenging in recent quarters, and we would be remiss not to highlight possible pandemic tail-risks that may still not be fully understood (e.g. pull-forward impacts) and headwinds from recessionary conditions on pre-need sales.
However, we are now four quarters into a more normalized post-COVID-19 environment, and PLC has stabilized results with a floor seemingly in place for margins (likely to remain in the 22-24% range near-term, in our view). Furthermore, we believe PLC has done the necessary retooling to provide increased managerial oversight and refocused its sales team in such a way that it can pivot rapidly to potential future curve balls. Also, the new FaCTS system is providing a greater degree of clarity and oversight into its properties/regions than ever before (including new segmented financial disclosures for Cemetery and Funeral properties).
M&A: We see PLC as well positioned to keep investing in its business while sourcing high-quality acquisitions given its manageable leverage ~2.8x (~2.1x, excluding equity-settled debentures), healthy FCF, and >$140mm of liquidity. Management noted that the pipeline is looking very strong, and alluded to potential for larger industry consolidation given interest-rate pressures.
TD Investment Conclusion
Our BUY recommendation and $34.00 target price remain unchanged.