Park Lawn Corp T.PLC

TD 2

[retiredcf]

Park Lawn Corp.

(PLC-T) C$28.62

Solid Q4 Beat; M&A to Drive Growth in '23; Some Margin Expansion

Event

Q4/22 adjusted EBITDA of $19.8mm was ~6% above TD/consensus at $18.6mm/ $18.5mm, reflecting stronger-than-expected revenues and modestly higher adjusted EBITDA margins (23.0%, TD: 22.8%).

Impact: POSITIVE

Q4/22 faced a very challenging comp, given the elevated Omicron-related deaths in the previous year. However, results remained solid, with PLC driving continued robust pre-need sales and market-share wins to mitigate the impacts of moderating mortality rates on at-need demand (PLC volumes declined 3.9% versus preliminary CDC data, which reports U.S. deaths down ~9% y/y). Additionally, pricing actions and operating-cost-mitigation strategies drove modest sequential margin recovery. Pre-need cemetery sales were bolstered by large group sales again this period. Management cautioned that these are not likely to repeat in 2023, but it still anticipates healthy sales levels from traditional customers as it executes a refreshed sales program, leveraging the new FaCTS system.

2023 outlook: Management expects growth from M&A and incremental margin improvement y/y in 2023. Organic growth is expected to be flattish, reflecting an assumption of mid-single-digit growth in total cemetery revenues and low-single-digit increases in average revenue per call on the funeral side, offset somewhat by low- single-digit declines in volumes as mortality rates continue to normalize (particularly in Q1/23 as PLC laps the last period with significant COVID-19-related deaths). In terms of margins, management did not specifically quantify the upside, but noted that it continues to see benefits from cost management, strategic pricing, and positive mix from high-quality acquisitions (EBITDA margins on all 2021/2022 acquisitions were "well-above 26%"). In our view, PLC continues to be in a building stage, with investments required in people and systems to meet its US$150mm 2026 EBITDA target. Although we expect this to keep margins below the 26% target over the near- and-medium term, we believe it is the right long-term decision.

TD Investment Conclusion

We expect near-term results to remain somewhat volatile as the industry progresses through the post-COVID-19 normalization, and given potential recessionary impacts on pre-need sales. However, we see PLC as well-positioned, given its solid balance sheet and ample opportunities/capacity to grow through M&A. Ultimately, we continue to view death-care services as largely recession-resistant, with favourable demographic tailwinds fast approaching (i.e., Baby Boomers).