Park Lawn: Decent Revenue And EBITDA Growth In Q2 2023 Thanks To M&A (TSX:PLC:CA)

Introduction

Canadian death care services provider Park Lawn Corp (TSX:PLC:CA) (OTCPK:PRRWF) is on stock watchlist and I’ve written two articles about the company on SA so far. The latest of them was late April and back then I said that Park Lawn was likely to achieve its 2026 goals of adjusted EBITDA and earnings per share (EPS) of $2.00 and that it looked undervalued.

Well, the company released its Q2 2023 financial results on August 10 and I think they were decent as adjusted EBITDA rose by 20.7% year on year to $18.8 million while EPS topped $0.22. In addition, revenues and EPS could receive a boost in the coming months as Park Lawn is trying to buy US sector player Carriage Services (CSV). Overall, my rating remains a strong buy. Let’s review.

Overview of the Q2 2023 financial results

If you aren’t familiar with Park Lawn or my earlier coverage, here’s a short description of the business. The company was established in 1892 and it had a network of 179 funeral homes, 145 cemeteries, and 45 funeral homes on cemeteries (known as on-sites) as of August 22, 2023. It’s the sole publicly traded owner and operator of funeral home and cemetery properties in Canada but almost 90% of the locations are spread across 19 states in the USA.

Park Lawn had just 81 locations in 2017 and it has been growing mainly through M&A over the past few years, typically making between 4 and 10 acquisitions annually. The company’s strategy is to invest an average of $75 million to $125 million in acquisitions per year and I think that betting on M&A makes a lot of sense as there is an abundance of small takeover candidate due to the high degree of fragmentation of the industry – about 80% of the $22 billion North American market is controlled by independent operators and there are just four companies with more than 200 locations each.

Turning our attention to the financial performance of the business, we can see that revenues have more than quintupled since 2017 to $323.6 million on a TTM basis but it seems that the economies of scale are small here as the operating income margin has increased from 12.2% to 14% over the period. It’s worth noting that revenues and operating income received a strong boost in 2020 and 2021 from higher death rates due to the COVID-19 pandemic.

Looking at the Q2 2023 financial results, I think they were decent as acquisitions boosted revenues by 12.3% year on year to $85.3 million while the adjusted EBITDA margin improved by 150 bps to 22.1% thanks to targeted pricing improvements and expense control measures. Revenues from comparable operations were flat as mortality rates decreased slightly compared to a year earlier. Adjusted EPS came in at $0.222, slightly above Q1 2023 levels.

In my view, adjusted EBITDA for Q3 2023 could surpass $20 million as Park Lawn completed several small acquisitions over the past few months – Speaks (April), Cobb Funeral Chapel and Cobb Suncrest Memorial Gardens (June), Ward Funeral Home (July), and M.W. Becker Funeral Home (August). These purchases added a total of 10 locations and are expected to add $5.1 million in combined annual adjusted EBITDA.

Looking at the balance sheet, net debt increased by $28.9 million compared to the end of 2022 and stood at $236.2 million as of June 2023. In my view, it’s at a manageable level as the net debt/adjusted EBITDA ratio is 3.05x on a TTM basis. Yet, it’s possible that the net debt increases significantly over the coming months as in late June Park Lawn confirmed media reports that it made an all-cash offer to acquire U.S. rival Carriage Services. The latter has a market capitalization of $455 million as of the time of writing and its net debt stood at $587.7 million at the end of June. To be fair, Park Lawn said that it partnered with an unnamed large private equity firm for the acquisition which means that its net debt is unlikely to increase to unsustainable levels. In addition, the company said that the potential purchase would be accretive to its earnings on a fully diluted basis which would put it a few steps closer to reaching its 2026 goals of adjusted EBITDA of $150 million and EPS of $2.00. Yet, I think that this potential acquisition is likely to face significant regulatory scrutiny considering Park Lawn and Carriage Services are the second and third largest death care services providers in the USA. It seems that many investors aren’t convinced this deal could go through either as Carriage Services is currently trading just 10.5% higher compared to the day before news about the offer came out. In my view, the 2026 goals seem achievable even without the acquisition of Carriage Services as I think that Park Lawn has enough liquidity available to continue to pursue an aggressive M&A strategy over the coming years. As of June 2023, the company had just $187 million outstanding on its $300 million credit facility (see page 30 here). In addition, free cash flow from operations was $10.8 million in Q2 2023.

Turning our attention to the valuation, the enterprise value stands at $798.8 million as of the time of writing and the company is trading at an EV/adjusted EBITDA ratio of 10.3x. This might seem high at first glance, but looking at the historical chart we can see that the EV/EBITDA multiple has seldom been as low as it’s today.

In my view, Park Lawn should be worth at least 15x EV/adjusted EBITDA considering it has a history of rapid revenue and EPS growth. This translates into around $26.81 per share or an upside potential of 64.1% as of the time of writing.

Looking at the downside risks, I think that the major ones are that organic growth could continue to be low and that the pace of acquisitions could slow down. This would result in lower revenue and EBITDA growth, and I think that the market valuation of Park Lawn could decrease significantly if the company abandons its 2026 goals. In addition, if Park Lawn ends up buying Carriage Services, the restructuring and integration of the latter’s operations could potentially prove to be a long and costly process.

Investor takeaway

Park Lawn is growing its business at a decent pace through acquisitions now that the boost from COVID-19 is gone. I think the company has a decent chance of meeting its 2026 goals even without the acquisition of Carriage Services. In my view, Park Lawn seems undervalued considering it has rarely traded below 15x EV/EBITDA over the past few years and I think the share price could gradually increase above $20 over the coming months.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.