CIBCEQUITY RESEARCH
May 14, 2023 Earnings Update
PARK LAWN CORP.
Birth Of New Disclosure A Win For Investors
Our Conclusion
We are maintaining our $30 price target and Neutral rating for Park Lawn on
slightly higher EBITDA and net debt estimates. Our most important takeaway
from the slight beat in Q1 was the release of new detailed disclosure by
segment, which we see as a positive development that could begin to compel
more investors. In our view, PLC requires M&A in order to grow, but
execution has been credible of late, and if the specter of interest rate
decreases forms, or if PLC executes a larger deal with greater synergy
potential, we believe PLC’s multiple could return to the ~12x average it has
traded at historically. We expect another tough quarter in Q2 from difficult
comparisons, but the growth-by-acquisition story continues to progress.
Key Points
Disclosure A Clear Benefit For Investors. A common observation we
encounter from PLC investors is the challenge in forecasting results and
understanding performance drivers. We believe this quarter’s introduction of
segmented performance (splitting the P&L by Funeral Homes and
Cemeteries) provides very useful insight. We expect that as FaCTS evolves,
investors will likely see more granular data on comparable performance, at-
need vs. pre-need, merchandise/services, and group sales.
Outperformance Vs. Industry In Q1. While U.S. mortalities in Q1 were
down ~14% Y/Y, PLC’s comparable funeral home call volumes declined
11.3% (overall comparable revenues at PLC declined 5.6%). Sales drivers
such as merchandise deliveries and large group sales are lumpy and may
not persist, but they could potentially support revenue growth through 2023.
Difficult To See Near-term Organic Growth; M&A A Necessity. Although
Q2/2023 onward should theoretically make for easier Y/Y comparisons from
COVID’s waning impact, the Q2 U.S. mortality rate QTD remains down mid-
teens. It’s a small sample size, but difficult to pinpoint an explanation. It is
possible the pull-forward of mortalities was greater than previously believed
and this could be another year of challenged organic growth. Historical
organic growth is difficult to estimate too, in our view. Between 2017-2021,
Park Lawn spent ~$550MM on acquisitions. An average multiple of 8.5x
would imply acquired EBITDA of $65MM, just 6% below 2022’s actual figure.
A Larger Deal Could Move The Needle. Solid FCF generation over the past
year has meant that despite ~$110MM in deals since the start of 2022, net
leverage stands at ~2.6x NTM EBITDA. This enables more deal-making but
we believe a potential catalyst for the stock would be if PLC can execute a
deal for one of the industry’s larger private players. Furthermore, in Q1 PLC
swapped an incremental $50MM of variable debt for floating (at a mix of
4.5% and 3.9%), providing some appealing certainty to its cost of capital.
PLC has >$150MM of cash and available liquidity