- Touting “encouraging” peer results, National Bank Financial analyst Zachary Evershed sees “compelling value” in Park Lawn Corp. ahead of the release of its third-quarter results on Thursday after the bell.
The analyst adjusted his estimates for the Toronto-based funeral home operator to account for the recently announced divestiture of legacy assets south of the border, including 72 cemeteries and 11 funeral homes, to Everstory Acquisition Portfolio in a transaction valued at approximately $70-million.
“We remove the estimated contribution of MMG, Saber and Citadel from our model as of year-end (with a minor offset from the addition of Christy-Smith), leaving our 2024 revenue estimate lighter by $54-million and our Adj. EBITDA forecast trimmed by $8.5-million,” he said.
“We view the announcement positively as the company was able to secure an 8 times multiple on a basket of what is likely their least attractive assets, being made up of primarily rural, smaller properties that operate at lower margins, which should set a valuation floor in the stock. Though we note some dilution on the Adj. EPS line at the moment, this should be offset by redeployment of the proceeds into accretive acquisitions.”
Mr. Evershed did not adjust his third-quarter expectations, but emphasized peer results are “promising” thus far.
“Competitor Service Corporation (SCI-N) reported slightly negative Funeral SSSG [same-store sales growth] at down 2.2 per cent year-over-year as the increase in average revenue per service of 4.3 per cent was not enough to offset a volume headwind of 6.2 per cent,” he said. “On a brighter note, Cemetery SSSG came in at up 5.2 per cent year-over-year. With the caveat that deathcare’s highly regional nature can lead to an imperfect readthrough from competitors, we estimate that SCI’s results adjusted for PLC’s funeral/cemetery split would translate to 2-per-cent organic growth for Park Lawn vs. our current Q3/23 estimate of a decline of 6.5 per cent, suggesting upside. We maintain our more bearish forecasts, however, out of an abundance of caution.”
Reiterating an “outperform” rating, Mr. Evershed lowered his target for Park Lawn shares to $22 from $31. The average is $28.44.
“As we modify our estimates for the divestment, we also adjust our valuation methodology to cap our target at a 6-per-cent FCF yield, a level we believe is more defensible given the current opportunity cost of cash investments,” he said. “We therefore move our target to $22 (was $31) on 8.5 times 2025 estimated EV/EBITDA (was 11 times). With the divestiture at 8 times providing a robust valuation backstop as the remaining portfolio is of higher quality, we view current trading levels (7.2 times EV/EBITDA, 7.8-per-cent FCF yield) as an attractive buying opportunity and emphatically reiterate our Outperform rating.”