Park Lawn Corp T.PLC

RBC Upgrade

[retiredcf]

Their upside scenario target is also raised to $57.00. GLTA

September 13, 2021

Outperform

TSX: PLC; CAD 36.67

Price Target CAD 50.00 ↑ 46.00

Park Lawn Corporation

Fertilizing the Lawn: Target to $50 on revised M&A expectations post equity offering

Our view: PLC's recent equity offering adds - more - dry powder to be redeployed on what we believe to be a robust M&A pipeline at attractive valuations, well below implied multiple on PLC's stock, driving net value accretion to shareholders. Our investment thesis is playing out as anticipated, with solid underlying organic growth augmented by M&A contribution, and, as pandemic impact wanes, higher pre-need call volume and revenue per call for at-need. Outperform rating predicated on sector- leading earnings growth, and underpinned by favorable demographic trends and a long tail of consolidation opportunities. Target +$4 to $50.

Key points:

Bottom line: While the news of an equity raise somewhat caught us off- guard given PLC's clean balance sheet and solid operating results, we take a positive view of the incremental M&A funding and see it as a tangible sign of a quite robust pipeline. We remain confident in management's ability to capitalize on the meaningful valuation delta between its currency and typical industry takeout multiples (6-9x), remaining disciplined on price while improving acquired operations over time, and surfacing value for S/H.

• $148.5MM share offering adds dry powder to an already clean B/S, implies M&A above prior forecasts. PLC's leverage ratio of 1.49x as at FQ2 - post-closing of the four W's acquisitions - was well below covenant levels (4x), implying potential near-term acquisition opportunities above previous expectations. We repeatedly pointed out that PLC appeared to have reached an inflection point, with a path to achieving earnings targets without requiring incremental equity, delivering rising returns to shareholders... with the caveat that substantially larger than forecasted M&A could require additional funds. The equity raise and conversations with management have caused us to revisit our assumptions around the size of near-term M&A opportunities for PLC.

• Revised M&A expectations add ~12% to 2023E EBITDA and a more modest 2% to EPS. Incorporating the 4.081MM incremental shares from the offering adds ~13.7% to PLC's share count. However, we are accelerating the pace of near-term M&A to $137.5 MM annually (from $85 MM) for F21/22E, with NTM ~$50MM/quarter before reverting to ~$20MM thereafter. Heightened deal activity in perspective: i) Q2/19 ~ $135MM offering followed by ~$165MM M&A spend in Q2/Q3, ii) Q2/18 ~$180MM offering followed by >$160MM M&A spend in Q2/Q3, and iii) Q2/17 ~$75MM offering followed by >$70MM M&A spend in Q3.

  Capital raise and subsequent anticipated redeployment towards M&A to drive net value accretion to PLC shareholders, target +$4 to $50. PLC is well positioned to take advantage of the valuation delta between its currency and industry multiples, driving forecasted 2020-23E EBITDA CAGR of 23%. PLC valuation remains compelling, in our view, with shares trading <12x our normalized C22E EBITDA. PLC is included on the RBC CM Small Cap Conviction List.