Park Lawn Corporation
Downsizing the lawn: PLC announces a well-telegraphed sale of under-scaled assets
TSX: PLC | CAD 18.32 | Outperform | Price Target CAD 33.00
Sentiment: Neutral
Bottom line: Modestly positive on enhanced asset quality and returns, and financial flexibility. Transaction once again underscores, in our view, PLC management discipline and focus on enhancing quality and growth potential of the company's asset base at the right price.
News: PLC to divest of a basket of low margin assets for aggregate proceeds of US$70 MM. The assets to be divested include 72 cemeteries and 11 funeral homes that in aggregate generated an estimated US$8.75 MM of TTM EBITDA. PLC will receive US$55 MM in cash, plus US$15 MM in deferred compensation bearing interest at 10% annually, due within 5 years after closing, which is estimated to occur by year-end 2023.
Well-telegraphed asset sale underscores PLC commitment to building a high quality, high return portfolio of assets in key markets...: With the business largely stabilized post-COVID, PLC did a deep dive into the performance and potential of its extended asset base and identified that these assets, which represent about 25% of the network but generate only an estimated 10-11% of 2023 forecasted EBITDA with little incremental upside. By selling the assets at what we view as an attractive 8x multiple, PLC would free up incremental balance sheet capacity to fund future M&A, which brings us to...
Compelling financial impact to help fund stated M&A strategy: As part of its 2026 financial target of US$150 MM in EBITDA, management articulated average annual M&A spend of US$75-$125 MM in pursuit of high quality local rooftops with strong community legacy and management. Our F23E forecast assumes M&A spend toward the lower end of that range, in part due to higher funding costs, which we estimate in the range of 6.5%. In the near term, PLC will redeploy the proceeds to reduce leverage, with PF leverage ratio including debentures reduced to 1.9x from 2.7x upon closing. Essentially, we estimate the US$70 MM proceeds from the transaction will be sufficient to fund one year of M&A. We estimate that net of all financial impacts, NT EPS dilution should be in the range of 2%, but over the MT the divestiture enables PLC to focus financial and management resources on building a higher margin, higher growth, higher return business.
Reiterating constructive view: Today's announcement and the recent decision to walk away from a potential Carriage Services transaction (NYSE: CSV) highlight PLC management discipline and focus, in our view. Although valuation is unlikely to improve meaningfully until we get a clearer line of sight on the macro backdrop/consumer spending trends, recent compression is consistent with other consumer-oriented small-cap names in our coverage. Nonetheless, we reiterate our conviction around PLC as disciplined acquirers, sellers and operators in a segment that should benefit from the long demographic tailwind of the aging population. PLC is on the RBC CM Small Cap Conviction List.