LifeWorks Inc. (TSX: LWRK) is a world leader in providing digital and in-person solutions that support the total wellbeing of employees – mental, financial, social and physical. The company uses technology-driven solutions and projects human resource data in a simple, accessible and intuitive format to its clients.

Key Highlights:

• Elevated Recurring Revenue: Since 2011, the company has consistently delivered higher income aided by constant growth from its recurring business. Notably, in FY20, the company’s ~96% of the total revenue came from its recurring segment. This is encouraging as it provides income and cash flow stability.  In 9MFY21, the company reported 9.3% growth in its recurring revenues supported by higher traction from the Administrative Solutions business and internet-based cognitive behavioral therapy services.                           

Source: Company presentation

• Product innovation: The company aiming towards product innovation and conducts consistent product assessment in order to provide updated digital and in-person solutions that supports the total wellbeing programs of its users. Notably, in the recent past, the company added specialized services like CareNow, Total Wellbeing Index and additional features on the LifeWorks application which are expected to provide self-guided programs for its users. Constant innovation of its product is a key positive as it helps the company to remain afloat within the industry.
  

• Growing traction within Integrated Health Solutions segment: The company offers integrated health solutions through utilizing the LifeWorks cloud-based platform to provide the full continuum of care for achieving mental, physical, social, and financial wellbeing. Within this space, the group provides a wide array of wellbeing and clinical services to the users and emphasizes on employee engagement and workforce productivity programs. During 9M FY21, the company has witnessed YoY revenue growth of ~7.1% and ~43.1% from Canada and International region from Integrated Health Segment.

• Increase in dividend payment: Despite the ongoing sluggish economic scenario, the company reported an increase in its dividend payment of CAD 40.2 million in 9MFY21, versus CAD 96.7 million in pcp. This is impressive as most of the companies are lowering or suspending their dividend payments in order to retain their liquidity.

• Sequentially improved margins: In Q3FY21, the company reported its operating margin 5% and net margin of 3.2%, respectively, as compared to a negative operating margin of 20.4% and negative net margin of 15.8%, respectively in Q2FY21. This indicates improved operational efficiency and prudent cost management.

Risks: The product and services of the company require constant upgradation and innovation in order to remain afloat within the industry. Notably, the company registered a higher salaries, benefits and contractor expenses of CAD 532.2 million in 9MFY21, which is higher than CAD 496.1 million in pcp. Continuation of the above trend might pose a threat to the company’s profitability and cash flows.

Q3FY21 Financial Highlights (in thousands of CAD)

Source: Company Report

• Registered revenue growth: LWRK declared its quarterly result, wherein the group reported its revenue of CAD 246.0 million, higher than CAD 240.3 million in Q3FY20. The surge was primarily due to organic growth from the Integrated Health Solutions business and iCBT services.
  

• Slight decline in operating expense: The company’s operating expenses stood at CAD 233.7 million in Q3FY21, marginally lower than CAD 235.9 million in pcp. The decline was primarily due to an inclusion of sublease loss provision amounting CAD 10.3 million in pcp. However, this was partially offset by higher salaries, benefits and contractor’s costs and an increase in other operating expenses.
  

• Reported net profit v/s net loss: In Q3FY21, the company incurred lower finance costs of CAD 5.1 million, as compared to CAD 6.6 million in pcp. The group posted its profit before income tax of CAD 8.4 million v/s a loss of CAD 1.9 million in pcp due lower operating expense. The company registered a net profit of CAD 7.9 million, as compared to a net loss of CAD 2.0 million in pcp.

Top-10 Shareholders:  Top ten shareholders of the company together hold approximately 53.12% stake, Mackenzie Financial Corporation, Jarislowsky Fraser, Ltd.  are the major shareholders in the company with an outstanding position of 15.01% and 13.05%, respectively.

Source: REFINITIV, Analysis by Kalkine Group.

Valuation Methodology (Illustrative): EV to Sales based

Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation:

Through its integrated solutions, LWRK caters to the pivotal areas like employee engagement, talent retention and productivity enhancement. This helps organizations to generate optimum productivity from its human resource and helps them to reach group goals, which is worth mentioning. Notably, in the recent past, the company received strong traction from its high-growth digital solutions like, AbilitiCBT, LifeWorks etc., while continuation of the above trend is likely to boost the company’s cash flows and profitability in the long-run. We have valued the stock using the EV to Sales based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered peers like Sterling Check Corp, HireRight Holdings Corp etc. Considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock of LWRK at the closing price of CAD 27.71 on January 21, 2022.

One-Year Technical Price Chart (as on January 21, 2022). Analysis by Kalkine Group

Technical Analysis Summary

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest. 

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest. 

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices 

Note 1: The reference data in this report has been partly sourced from REFINITIV. 

Note 2: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

Disclaimer

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