Improved Performance Driven by Robust Growth in US Segment: Park Lawn Corporation (TSX: PLC) is a leading Canadian based funeral, cremation and cemetery provider, and is the fastest-growing group in the industry in North America. The business has grown-up from six cemetery properties to a diverse portfolio of properties and businesses operating across Canada and the US.

Key Business Highlights, Drivers and Outlook:

• Demand Drivers: The company’s demand drivers include favorable demographics like the aging population and increasing death rate. The management is focusing on introducing new products/services, on-site funeral homes, investment in mausoleums, and other projects. The personal services sector is driven by high entry barriers due to zoning regulations which results in the pricing pressure on smaller operators.

• Market Share: The Group operates in micro markets with an entrepreneurial and adaptable business model and has exposure to markets with high cremation rates like Toronto, New York, New Jersey, New Mexico. The company conducts more than 50 per cent of cremations performed in Toronto. The company derived ~82% and 18% of the revenue from the US and Canada market, and the business is expected to witness higher revenue on account of appreciating US$. 

• Medium-Term Outlook: The Management is targeting an EBITDA of CAD 100 million by FY22 through organic growth, margin expansion and acquisitions. Further, the company intends to improve its operating margins through improved scale of operations and operating efficiencies. Future acquisitions are expected to contribute CAD 35 million in incremental EBITDA by the financial year 2022. The business is in the process of completing the acquisitions of Family Legacy, LLC and WG-TN, LLC within Q1FY20 which will provide 8 standalone funeral homes, followed by 2 standalone cemeteries and 4 combinational funeral home and cemetery properties.

Q3FY19 Financial Highlights (for the three months ended 30 September 2019)  

Q3FY19 Income Statement Highlights (Source: Company Reports)

For the three months ended 30^th September 2019, PLC reported revenue of CAD 66.58 million, as compared to CAD 43.24 million in FY18. The increase was driven by robust growth in the US market, partially offset by tepid scenario across Canada. The gross profit improved drastically to CAD 54.04 million, as compared to CAD 34.52 million in FY18. Earnings from operations from stood at CAD 6.72 million, as compared to CAD 5.71 million in FY18. The business reported an acquisition and integration cost of CAD 4.39 million in FY19.

Stock Recommendation: The stock of PLC closed at CAD 18.81 with a market capitalization of ~CAD 537.88 million. The stock made a 52-week low and high of CAD 17.91 and CAD 31.77, respectively. The company has continued to increase the number of cemeteries and added funeral home assets across strategic markets in the U.S. The business acquired Family Legacy, LLC and WG-TN, LLC which is expected to add ~3,000 funerals and ~1,000 interments per year. Despite a small-cap company, the Group has a track record of paying dividends, which is uncommon in many small-cap companies. The company’s stock has given investors 34.41% and 28.15% of a negative return in the last one month and six months, respectively. The stock is available at a price to earnings multiples of 22.3x on its trailing twelve months basis, as compared to the industry median of 6.9x. Considering the above fact, we believe the premium valuation is justified owing to the growth story and market dominance of the company. Hence looking at the recent price movement, industry scenario and dominance of few players within the industry, we recommend a “Speculative Buy” rating in the stock at CAD 18.81 as on 20^th March 2020.

PLC Daily Technical Chart (Source: Thomson Reuters)

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