Park Lawn Corporation
Green pastures: Reiterating OP Rating, $50 price target ahead of Q4 results
Our view: Since our late-2020 initiation on PLC, the investment thesis appears to be playing out as anticipated: Solid underlying organic growth augmented by M&A, and as pandemic impact wanes, higher revenue per call for at-need and heightened number of calls for pre- need. Our Outperform rating is predicated on sector-leading earnings growth, underpinned by favorable demographic trends and a long tail of consolidation opportunities, with a strong balance sheet to fund M&A. Price target unchanged at $50.
Key points:
Forecasts essentially unchanged ahead of Q4 results to be released on March 3 (AMC). Our Q4 revenue and EBITDA estimates of $101 MM (+14%) and $26 MM (+7%) are consistent with consensus, with Y/Y growth moderated by tough comps. Our SSS (ex-FX) estimates of -3.5% and -3.6% Y/Y in CQ4 and CQ1, respectively, could ultimately prove to be conservative given recent industry data points (exhibits 2-5).
• Strong B/S to continue M&A journey: On the Q3 call, management described the M&A opportunity as a queue rather than a pipeline, reflecting their positioning as operators who grow through consolidation, rather than consolidators. Our model incorporates cumulative M&A spend of ~$375 MM to the end of F2023, a key driver of our 24% three- year EBITDA CAGR to F23E, LTM EBITDA leverage stable in the range of 2x.
• Strong organic demand/pre-need outlook as pandemic triggers end- of-life planning: While accelerating pre-need call volume is one notable byproduct of the pandemic, the effect is likely to linger long after the pandemic wanes as consumers progressively recognize the importance of end-of-life planning. As a result, management considers the increase in pre-need sales as a pandemic-triggered event with a degree of stickiness, rather than a pull-forward of demand. This should help sustain strong call volumes and average revenue per call, albeit at a normalizing pace. Moreover, contribution from high-quality M&A is another key underpinning of sustainable average revenue per call.
• Modest and manageable inflationary pressure: While management acknowledged creeping inflationary pressure on its last call, to date inflation has remained relatively modest and highly manageable. The majority of vendors are under long-term contract, with long lead time and good visibility to adjust consumer prices accordingly. Labour inflation is also relatively modest, affecting primarily transitory workers.
Reiterating Outperform rating, $50 price target unchanged. PLC valuation remains compelling, in our view; shares currently trading at ~12x C22E EBITDA, roughly in line with the industry average and SCI, and toward the low end of the four-year range, notwithstanding stronger absolute and relative growth outlook. Key catalysts for valuation re-rating likely, in our view: i) more substantive M&A announcements, ii) update to financial targets (hopefully) in early 2022. PLC is included on the RBC CM Canadian Small Cap Conviction List.