Park Lawn Corporation
Daisy chain: PLC Q3 results reflect normalizing death rates, price target to $25
Our view: Q3/23 results a hair below forecast, underlying trends reflective of normalization of death rates and lower pre-need sales. Early look at reclassification of assets/liabilities to reflect imminent sale of under- performing assets reaffirms our view that while overall earnings will take a step back, surfacing of capital to fund high-grading of assets is a very sensible decision from this highly focused, return-oriented management team. Our forecasts do not yet reflect the asset sales pending details around line items, but we reiterate our view that net impact should be very modest with NT EPS dilution estimated ~2%.
Key points:
Q3 revenues in line with forecast/consensus and reflective of Y/Y death rate declines and cadence of M&A in 2022/23; EBITDA just below low end of forecast range but given puts and takes, close enough to call "in- line". Adjusted Q3 EBITDA $18.8 MM, +3.6% (RBCe $19.8 MM, forecast range $19.1 MM-$21.0 MM), adjusted EPS $0.15, -31% (RBCe/consensus: $0.20-$0.23). As we move through 2023 and past the demand distortions of 2020–22, and as PLC likely reaps the benefits of FaCTS, divests of under- performing assets, redeploys the proceeds to execute on high-value M&A, and surfaces benefits of scaling, the company should be well positioned as it moves toward its 2026 EBITDA target of US$150 MM. Based on our calculations, M&A spend toward the higher end of the annual target range would be required to achieve the $150 MM EBITDA target. Q3 revenue growth +8% driven by M&A, comparable operations -4% Y/Y due to normalizing death rates, and lower pre-need sales due to the cancellation of a large group Cemetery contract as management determined that the capital costs related to developing and maintaining the property did not justify the potential ROI, underlying pre-need sales +2.4%. On the Funeral side, calls volumes -5%, offset by +6.7% increase in revenue per call.
Steadily pursuing M&A. YTD in 2023, PLC has closed six acquisitions of well- respected operators, YTD spend $66 MM, positioning PLC to deliver M&A at/below the low-end of indicative annual range $75-$125 MM. Looking further ahead, our forecasts are predicated on M&A toward the middle of that LT range.
Moderating forecasts on cadence of M&A, cautious consumer spending, F24/25 EBITDA -6.5%. PT to $25 (from $27), return to more favourable growth and more substantive M&A key to re-rating, in our view. Q3 EBITDA leverage 3.15x including debentures should be reduced by 0.8x upon closing of asset sale as PLC uses proceeds to reduce balance on credit facility. Proceeds essentially fund one year worth of M&A (at low end of target range). Valuation attractive but near-term visibility muddled by transient elements, notably: i) moderating death rate, ii) tighter consumer spending impacting pre-need sales; iii) high fixed cost business impacting operating leverage. PLC is on the RBC CM Small Cap Conviction List.