2023-10-01 04:47:00 ET
Summary
- Park Lawn has grown its revenue and EBITDA at an impressive CAGR of 37%, driven by an aggressive expansion strategy through M&A, new market entry, and Greenfield projects.
- PLC’s business plan is simple, offering a wide variety of deathcare services. The key has been to acquire new locations and expand its US presence.
- The offer to acquire CSV would be the crown jewel of this strategy but comes with various risks associated with debt and funding.
- The deathcare industry / PLC is positioned to benefit from a range of tailwinds, including an aging population, the fragmented nature of the industry, new greenfield projects, and the demand for cremation.
- We see scope for margin improvement through group-level efficiencies, which is the final requirement to making PLC a leading option relative to its peers.
Investment thesis
Our current investment thesis is:
- Park Lawn Corporation (PLC:CA) (PRRWF) ("PLC") operates in a non-cyclical industry that is currently in the midst of a several-decade upswing, as the North American population continues to age with slowing birth rates. In conjunction with this, PLC has several opportunities to enhance its growth, as there are high barriers to entry and a large number of small players (fragmented industry) that it can acquire. To a lesser extent, the increased demand for Cremation is beneficial to the business, as is the optionality of Greenfield expansion and operational improvements to drive efficiency.
- We do see issues with the company, particularly around funding. This increases risks but we believe its non-cyclical cash flows and simplistic business model should mean a period of deleveraging in the worst case is possible, but ideally, its acquisitions will be accretive relative to debt (diluting net debt compared to EBITDA).
- PLC’s share price has had a tough time lately yet continues to positively develop and generate greater shareholder value. We see the reasons for shareholder hesitancy but with a substantial discount to its historical average and a NTM FCF yield of 8.1%, we see value here.
Company description
Park Lawn Corporation ("PLC") is a Canadian-based company engaged in the cemetery and funeral services industry. Founded in 2013 and headquartered in Toronto, Ontario, Park Lawn operates cemeteries, funeral homes, and crematoria in Canada and the United States. The company's operations span across various regions, offering a range of funeral and cemetery products and services.
Share price
PLC’s share price has generated strong returns during the last decade, which are broadly comparable to the S&P 500 when factoring in total distributions. This is a reflection of the company’s impressive trajectory with rapid growth.
Financial analysis
Park Lawn Financials (Capital IQ)
Presented above are PLC's financial results.
Revenue & Commercial Factors
PLC’s revenue has grown at an impressive 37% CAGR during the last decade, with broadly consistent high returns YoY. This has been materially accelerated by inorganic M&A. Despite the heavy M&A activity, PLC has maintained comparable EBITDA growth, ensuring minimal dilution with scale.
Business Model
PLC operates funeral homes and crematoriums, offering a wide range of services related to end-of-life planning, memorialization, and grief support. These services include funeral arrangements, cremation options, pre-planning services, and memorialization products.
The company owns and manages cemeteries, providing burial spaces, mausoleums, and related services. This includes the sale of cemetery plots, headstones, and maintenance services.
PLC’s roots are in Canada, however, the company has heavily expanded into the US, with this remaining their core strategic focus. The company currently has 326 locations in total, 289 of which are in the US.
PLC offers pre-need funeral and cemetery services, allowing individuals to plan and prepay for their arrangements in advance. The rationale for individuals is peace of mind, while PLC benefits from more stable revenue and greater certainty over winning customers.
The company operates across various market segments, including funeral homes, cemeteries, crematoriums, and pre-planning services. This diversified approach helps mitigate risks associated with economic fluctuations and changing preferences.
PLC has actively sought strategic acquisitions of funeral homes, cemeteries, and related businesses, with a continued strategic focus on this. Management’s philosophy is that a significant portion of the market remains untapped and so M&A provides greater speed to expanding the overall business. This growth strategy has allowed the company to rapidly gain market share and expand its geographical presence.
Strategy (PLC)
Deathcare Industry
The Funeral Home and Funeral Service industry is forecast to grow at a CAGR of 5.6% between 2023 and 2031, slightly improving from the rate achieved historically. We believe this organic growth rate is highly attractive for a mature industry, as it materially exceeds the long-term inflation target, with M&A and greenfield expansion making it fairly reasonable to exceed 10%.
PLC competes with several other funeral service providers in Canada and the United States, including Service Corporation International ( SCI ), Carriage Services ( CSV ), and StoneMor Partners.
We consider the following factors to be key growth drivers in the coming years:
- Death and Taxes - Without celebrating the concept of death, it is something that happens to us all, and PLC is positioned to benefit from this. With global growth in population and growing incomes, the demand for PLC’s services will incrementally improve.
- Demographic Trends - An aging population in North America has resulted in an increased demand for deathcare services. This is expected to accelerate in the coming years, as the birth rate continues to slow with individuals dissuaded from having families. This is shown in the following graph.
Population Demographic (PLC)
- Consolidation of the Deathcare Industry (Fragmented) - The deathcare industry has seen significant consolidation in recent years, with larger companies acquiring smaller, independent operators. PLC's acquisition-focused growth strategy positions it well to lead this in the coming years, with scope for shared competencies, greater scale, a unified brand, and economies of scale.
- Synergies from Acquisitions - PLC's lack of material margin improvement implies scope for synergies in our view, as its various locations are positioned to benefit from shared operational activities, such as systems, sourcing, etc.
- Geographic Expansion - Although PLC has strong exposure within the US, the scope for growth remains high, particularly in new States. This should ensure good runway for further expansion. Beyond this, there is the potential for other Anglosphere or LatAm nations.
- Greenfield Projects - In conjunction with conducting M&A, Management is seeking to exploit opportunities to conduct Greenfield projects, with a target IRR of 20%. This is comfortably above its current ROE, suggesting accretive returns are possible. Importantly, we consider these “low risk”, mainly due to the fact it is focused on expanding existing locations with value drivers, rather than building new locations (which we are also supportive of).
- Higher Demand for Cremation - The number of cremations in North America has consistently grown during the last decade, as cultural traditions decline. This is likely a trend that will continue, with a clear shift toward the “nuclear family”. PLC has exposure to high cremation markets and low, with strong expertise in both. PLC is the #1 player in the US for cremation and also has “CremateSimple”, a cremation alternative.
Cremation (PLC)
- High Barriers to Entry - The infrastructure, brand, and expertise required within this industry is high. The biggest factor, however, is regulation and the allocation of land toward Cemeteries, etc. This has meant a low number of new market entrants, representing a strong position for PLC as a current incumbent on a growth trajectory.
Margins
PLC’s margins have broadly traded sideways during the historical period, with GPM and S&A spending allocation contributing to a net nil movement. As previously mentioned, we believe there should be scope for upside based on this, with economies of scale and superior integration contributing to margin improvement. There is no reason why an infrastructure and national business such as this has the same margins at $16m in revenue as it does at $334m.
Quarterly results
PLC’s most recent performance is respectable, with revenue growth of +9.5%, +9.8%, +4,2%, and +12.2% in the last four quarters. This implies the current economic conditions are not weighing heavily on the demand for its services, with strong organic growth. This rate is clearly not in line with what has been achieved historically but is nevertheless good in our view.
What is slightly more problematic, however, is that margins have slipped, with an EBITDA-M of 18.4% in its most recent quarter bringing the company down. This is partially seasonal in nature and so we are not overly concerned, but this should be monitored further.
Balance sheet & Cash Flows
PLC’s aggressive M&A strategy has not come cheap, with the company utilizing debt and shareholder capital to fund much of this. This is partially the reason for the negative share price performance, as investors are never eager to fund a company. With a ND/EBITDA ratio of 3.7x and interest at 4% of revenue, the company is likely at a reasonable maximum.
In theory, PLC should slow acquisitions and utilize FCF to repay debt. However, the business can also reduce its debt relative to the size of the business by achieving larger growth, which we suspect will occur. So long as the EBITDA acquired is dilutive relative to the current ratio, this debt ratio will decline. It is a fine line, however, so makes PLC a higher-risk business.
Most recently, PLC has made a takeover offer for Carriage Services, a direct US peer , in an all-cash deal. This will inevitably worsen its financial position initially, although CSV comes with better margins. Management has stated “ Park Lawn has partnered with a large private equity firm and does not anticipate that it would require any public equity financing in order to complete such a transaction ” but it does mean future transaction could be impacted. At a 6x ND/EBITDA ratio, however, Management needs to be careful to ensure they can adequately operate the combined group.
Outlook
Presented above is Wall Street's consensus view on the coming 5 years.
Analysts are forecasting a material slowdown in growth, with a CAGR of 5% into FY27F. In conjunction with this, margins are expected to incrementally improve, although this is inconclusive.
Forecasting future M&A activity is difficult, with analysts likely taking the view that this will grind to a halt in the coming years, contributing to only organic growth and reduced expansion. From a conservative perspective, we consider this reasonable, although suspect there will be greater activity and potentially slightly higher organic growth (5-6% as per industry research).
We also believe the margin assessment is conservative, as the business should have scope for healthy group synergies and efficiency gains through the full integration of acquired entities and greater scale.
Industry analysis
Specialized Consumer Services Stocks (Seeking Alpha)
Presented above is a comparison of PLC's growth and profitability to the average of the Specialized Consumer Services Stocks industry, as defined by Seeking Alpha (9 companies).
PLC performs fairly well relative to this peer group. The company’s growth is materially above the industry average, owing to its aggressive M&A activity and focus on geographical expansion. Importantly, the company’s growth is expected to normalize at the average of its 5Y industry average, implying a healthy position on an organic basis.
PLC is lagging behind on a margin basis, although it should be appreciated that this is a group of high-performing companies with an impressive absolute level. We believe PLC is positioned to close this gap through a focus on cost minimization, although will likely remain below on an EBITDA basis.
Valuation
PLC is currently trading at 11x LTM EBITDA and 8x NTM EBITDA. This is a discount to its historical average.
PLC’s valuation has significantly declined in the last 5 years, losing over 25% of its value during this time. A portion of this is likely a hangover impact following the pandemic. Our view is that a discount to its historical average is warranted, primarily due to the company’s current debt balance, the potential for raising equity capital, and the lack of margin improvement with scale. This said, a discount of 50-60% on an EBITDA basis appears extreme.
Further, PLC is trading at a slightly smaller discount to its peers. We consider the discount reasonable without necessarily being clearly justifiable. PLC has a strong growth trajectory and good profitability, which is comparable to its peers. The key commercial value we see is its strong market position and scope for growth within this fragmented industry.
When compared to its historical average, we see substantial upside with this stock (strong double-digit), underpinned by its impressive FCF yield of 8.1%. Conversely, when pegged to peers, the upside shrinks somewhat (low double-digit). Given the funding requirements that will come with the CSV acquisition, the FCF advantage will be constrained in the near term, so we would conservatively suggest a valuation closer to the lower range.
Key risks with our thesis
The risks to our current thesis are:
- Share dilution to fund future acquisitions - With debt limiting the scope for continued acquisitions and absolute FCF being at a restrictive level, we could see more equity raises to fund acquisitions.
- Debt burden - As discussed, the company’s debt burden is approaching an uncomfortable level, with the proposed CSV acquisition taking it into this area. With elevated rates, Management needs to be extremely careful.
Final thoughts
PLC is a highly attractive business in our view. The company operates in an industry that is expected to grow well over the coming decades, with tailwinds and changing dynamics contributing to increased demand. The key downside protection is that the business is significantly less cyclical, as there are really only two things guaranteed in life.
From an internal operational perspective, we believe Management’s broader strategy has been a good one. Its aggressive expansion is taking advantage of industry opportunities, namely fragmentation and high barriers to entry, allowing for an increased share of this growth.
We are hesitant that PLC’s growth trajectory will slow, particularly if it closes the CSV transaction. Nevertheless, there are heightened risks associated with this business given its debt burden and funding needs.
Overall, its deep discount and strong FCF yield are sufficient to imply a buy rating in our view.
For further details see:
Park Lawn: 2 Things Are Guaranteed, Death And Taxes