Park Lawn Corporation
Model update: Tweaking forecasts, target to $27 ahead of FQ3
Our view: Fine-tuning Q3 revenue drivers, notably timing of M&A and same-store revenue results in a $1.8 MM/8% reduction in 23Q3 EBITDA to $19.8 MM. And while our medium-term forecasts remain broadly unchanged, we are moderating our target to $27 (-$6) as we pare back our target multiple from 12.25x to 10.5x Q1/F25 TTM EBITDA to reflect higher for longer on interest rates, cadence of forward M&A and muddled visibility. Reiterating OP rating and constructive LT outlook. We remind investors that our forecasts do not reflect the planned divestiture of under- scaled assets announced mid-October.
Key points:
PLC well positioned to accelerate growth in 2024/2025, as we move through pandemic demand distortions, and as the company reaps the benefits of FaCTS, redeploys proceeds of the sale of under-scaled assets/ executes on M&A, and surfaces benefits of scaling.
Our near-term forecasts assume M&A spend toward the lower end of the US$75-$125 MM target range, in part due to higher funding costs. This assumption may prove conservative given $70 MM asset sale. Importantly, M&A spend is expected to ebb and flow with market conditions and asset availability, which is the correct way to manage the business, in our view. Looking further ahead, our forecasts are predicated on M&A toward the middle of that LT range. Accelerating pace of M&A and/or substantive transaction could drive upside to forecasts pro-forma the planned divestiture.
Well positioned to fund growth with undrawn balance of $113 MM on $300 MM credit facility at the end of Q2 and US$70 MM proceeds from the sale of under-scaled assets. 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. 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: 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.