LifeWorks Inc. (TSX: LWRK), formerly Morneau Shepell Inc., is a Canada-based company, which provides personalized, digital health solutions. The company offers various features to support employee needs, when and how they need it. It delivers technology-enabled solutions that help clients with what they need to support the mental, physical, social, and financial wellbeing of their human resources. Its solutions include employee and family assistance, health and wellness, recognition, pension and benefits administration, retirement and financial consulting, actuarial and investment services.

Investment Rationale

• Healthy Q3FY21 Financial Numbers: The company recorded good sales growth in Q3FY21 and constant currency organic revenue growth, contributing to a great YTD performance. Compared to the same time last year, constant currency organic growth was 3.7% and reported revenue growth was 2.4%, for a total of CAD 246.1 million, contributing to YTD growth of 7.0% and 4.3%, respectively, compared to 2020. Organic expansion in the business drove year-to-date growth, which was somewhat offset by unfavorable foreign exchange movements.

Source: Company

• Balanced Revenue Mix: Administrative Solutions, one of the company's four operating areas or primary lines of business, was the largest revenue generator in Q3FY21. It represented about 40% of the overall revenue, with Integrated Health Solutions accounting for 39% and Retirement Financial Solutions and Health & Productivity Solutions accounting for the balance. While Canada is the company's most prominent area, accounting for 58% of consolidated revenue, followed by the United States (35%) and other foreign regions (7%). We believe that diversification is critical to the company's long-term viability, which is commendable.

Source: Company

• Growing Recurring Revenue: Despite the turmoil in 2020, the company maintained its pace and witnessed the spirited performance across its annual recurring revenue. In 9MFY21, the group generated CAD 761.0 million in consolidated revenue, a 4.3% increase from the previous corresponding period. We believe the company is continuously working closely with its clientele; thus, it witnessed an increase in presence and volumes, which is appreciable. 

Source: Company

• Investing in Technology to Drive Efficiency: For its organizational programs and AbilitiCBT, its market-leading iCBT solution, LWRK is utilizing its proprietary Abiliti platform. Through AbilitiCBT and non-occupational absence management solutions, the company addresses the complicated end of the continuum of care. It is also investing in digital product innovation and deploying artificial intelligence (AI) to boost profits and efficiency. This, we feel, will strengthen the company's technological infrastructure, which is a significant benefit.
  

• Clocking Higher EBITDA: In Q3FY21, the firm reported a greater EBITDA of CAD 39.5 million, compared to CAD 33.8 million in the previous corresponding period, owing to decreased borrowing costs and lower depreciation and amortization expense. Due to lower interest rates, finance costs decreased by CAD 1.5 million, or 22.7% for the quarter.
  

• Free Cash Flows: Despite lower cash provided by operating activities of CAD 36.8 million for the three months ended September 30, 2021, due to unfavorable changes in working capital of CAD 17.9 million due to an increase in trade and other receivables, the company managed to generate CAD 18.2 million in free cash flows. In such difficult times, generating free cash flows is a remarkable feat.
  

• Consistent Dividend Distribution: Given the strength of the business over the past few quarters, improved cost structure, strong balance sheet and solid cash flow, the company has paid a dividend consistently. Recently, it declared a monthly dividend of CAD 0.065 per share, to be paid on December 15, 2021.

Source: Refinitiv 

• Risks Associated with Investment: Because the company competes in a highly competitive market, it must adapt to and compete with rapid changes in technology, industry standards, and client preferences in order to stay afloat. This could result in significant input costs, which could adversely impact its profit margins.

Q3FY21 Financial Overview

Source: Company

• Higher Operating Revenues: Revenue for the third quarter increased by CAD 5.8 million, or 2.4%, to CAD 246.1 million compared to CAD 240.3 million in Q3FY20. The increase was primarily due to organic growth from the Integrated Health Solutions business and iCBT services.
• Marginal Decline in Operating Expenses: The company's consolidated operating expenses in Q3FY21 stood at CAD 233.8 million compared to CAD 235.9 million in pcp.
• Lower Finance Expenses: The company incurred lower finance costs of CAD 5.2 million against CAD 6.7 million in pcp.
• Loss to Profit Turnaround: In the reported period, due to the above-stated reasons and no provision cost for sublease, LWRK recorded a net profit of CAD 8.0 million against a loss of CAD 2.1 million in pcp.

Top-10 Shareholders

The top 10 shareholders have been highlighted in the table, which forms around 49.88% of the total shareholding. Mackenzie Financial Corporation and Jarislowsky Fraser, Ltd. hold the company's maximum interests at 15.03% and 10.29%, respectively. The company's institutional ownership stood at 61.90%. Higher institutional holdings transform the confidence in retail investors.

Source: Refinitiv 

Valuation Methodology (Illustrative): EV to Sales based Valuation Metrics 

Note: Premium (discount) is based on our assessment of the company's growth drivers, economic moat, competitive advantage, stock's current and historical multiple against peer group average/median and investment risks.

Stock Recommendation

The company had a good third quarter, contributing to solid year-to-date results driven by constant currency organic growth in revenue. Client interest in the multi-modal platform approach to employee wellbeing is at an all-time high in fast-changing and developing wellbeing markets, where demand is robust, and the future is highly favorable, as seen by sales and pipeline. In addition, the company strengthened its position as a global leader in total wellbeing by increasing the number of people who use its LifeWorks platform, broadening the base of tech-enabled recurring revenues, and expanding into the high-potential digital health market where it is uniquely positioned. Therefore, based on the above rationale and valuation, we recommend a "Buy" rating at the closing price of CAD 26.93 on November 19, 2021. We have considered Staffing 360 Solutions Inc, Insperity Inc, TrueBlue Inc, etc., for the peer group comparison.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached.

Technical Analysis Summary

One-Year Technical Price Chart (as on November 19, 2021). Source: REFINITIV, Analysis by Kalkine Group

*The reference data in this report has been partly sourced from REFINITIV.

*Recommendation is valid on November 22, 2021, price as well.

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