Stifel analyst Martin Landry sees Park Lawn Corp.’s plan to divest of a portfolio of low-margin cemeteries and funeral homes south of the border for US$70-million as a “significant transaction.”
On Tuesday after the bell, the Toronto-based company announced a plan to sell 72 cemeteries and 11 funeral homes in Kentucky, Michigan, North Carolina and South Carolina to Everstory Acquisition Portfolio LLC in a deal expected to close by the end of the calendar year. Those assets generated 10-12 per cent of its trailing EBITDA.
“The purchase price represents an approximately 8.0 times TTM [trailing 12-month] adjusted EBITDA multiple,” said Mr. Landry. “Assuming the assets divested had limited growth potential and margin upside, we view the valuation received as appealing. It is certainly supportive of PLC’s current valuation, which stands at 8.1 times on a forward basis. It also points to valuation upside on the company’s remaining assets which theoretically have a higher margin profile, potentially stronger growth prospects and higher cash generation.”
“This announcement does not come as a surprised given that Park Lawn’s management had previously hinted at the possibility of selling these ‘legacy’ assets. According to management, these properties, primarily cemeteries in rural markets, had limited margin upside potential given the relatively small scale of their operation. Additionally, these assets’ smaller scale resulted in less stable margin profiles and created unwanted volatility in profitability. To put this in perspective, in Q2/23, these businesses had a 400 basis points negative impact on PLC’s consolidated field margins.”
While Park Lawn expects to redeploy the proceeds into larger and higher volume businesses which should carry higher profit margins, Mr. Landry lowered his near-term estimates to reflect the divestiture.
“We have also adjusted our forecasts for the two small acquisitions announced by PLC post its Q2/23 results, which are expected to contribute to roughly US$685k of EBITDA annually,” he said. “The aforementioned results in a 16-per-cent decrease in our 2024 revenue estimates, and a 9-per-cent decline in our 2024 adjusted EBITDA estimates. Our 2024 EPS estimates is reduced by 10 per cent to US$0.96.”
“On the positive side, this transaction should result in higher margins which should facilitate comparison to other publicly traded companies. It should also reduce leverage to 2.7 times down from 3.1 times previously. The valuation received, at 8 times EBITDA, is also supportive PLC’s current valuation and support our case for higher valuation for PLC’s remaining businesses.”
With those changes, his target for Park Lawn shares slid to $30 from $32 with a “buy” recommendation, touting its “experienced management team with [a] strong track record” in an “appealing” and potentially “lucrative” industry. The average target on the Street is $29.75.
Touting the potential for earnings per share at an annual rate of 20-per-cent-plus through 2026, Mr. Landry added: “We see significant growth potential for PLC driven by 3-per-cent to 4-per-cent organic growth and a strong M&A pipeline. The death care industry remains poised for consolidation, with an estimated 75 per cent of the $22 billion North American industry being shared amongst independents or smaller consolidators. This dynamic creates an opportunity for PLC to consolidate the industry given its access to capital markets.”