Morneau Shepell Inc (TSX: MSI) is a leading provider of technology-enabled HR services that deliver an integrated approach to employee well-being through Morneau’s cloud-based platform. The company’s focus is providing world-class solutions to its clients to support the mental, physical, social and financial well-being of their people. The company’s approach spans services in employee and family assistance, health and wellness, recognition, pension and benefits administration, retirement consulting, actuarial and investment services. Morneau Shepell employs approximately 6,000 employees who work with some 24,000 client organizations that use the company’s services in Canada, the United States and around the globe.

Investment Rationale

• Bullish Price Trend: MSI Shares are hovering in bullish territory, with its shares traded well above the crucial long-term as well as short-term support levels of 200-day and 50-day SMAs, which implies a bullish momentum in the stock. At the last closing, its shares were trading approximately 7% above the crucial long-term support levels of 200-day SMA. Moreover, the moving averages are also rising, which is another bullish indicator. Recently, its shares consolidated after a strong run since October 2020, though stock managed to move up higher on Friday (March 19) and traded above the 50-day SMA. Also, the leading momentum indicator 14-day RSI is recovering and hovering in the neutral zone at 43.

Technical Price Chart (as on March 19, 2021). Source: Refinitiv (Thomson Reuters)

• Strong Insider Buying Over Last 1-Year: Insiders remain net buyers over the past one year and utilized periodic price correction as an opportunity to increase holding. Insiders’ confidence in the stock typically provides some confidence in the retail shareholders as their buying indicate a better future of the business. Though exceptions are there, but insiders buying amid a blood bath in the financial markets generally provides a lot of confidence to the minority shareholders.

Insider Buying Activity over the Last 1-Year. Source: Refinitiv (Thomson Reuters)

• Decent Quarterly Performance: The group delivered a solid fourth quarter, led by organic revenue growth of 4.4%. Overall revenue growth of CAD 2.1 million or 0.8% versus the comparative period is primarily due to organic growth, which was partially offset by the divestiture of benefits consulting business in the first quarter of 2020. Further, Free Cash Flow for the three months ended December 31, 2020, increased by CAD 22.1 million to CAD 34.1 million compared to CAD 12.0 million for the same period in 2019. The increase is due to higher cash generated from operating activities, including changes in operating working capital of CAD 17.9 million, partially offset by higher capital expenditures of CAD 0.7 million. Normalized Free Cash Flow for the three months ended December 31, 2020, increased by CAD 5.0 million to CAD 23.0 million compared to CAD 18.0 million for the same period in 2019. 

• Recent Acquisition Poised Well to Capitalize Future Opportunities: Subsequent to the end of the financial year 2020, the Company has acquired all of the outstanding shares of SMG Health Pty Ltd (“SMG”) through its LifeWorks business in Australia. SMG’s services combine mental health services, physical wellbeing checks and social health programs to deliver improved individual and organizational performance and productivity. Together, they will bring an unmatched range of services to achieve complete mental, physical, social and financial wellbeing for people in Australia. 

• Business Remain Resilient Despite COVID-19 Outbreak: At a challenging time like no other, the Company delivered a solid year in 2020 that featured revenue and profitability growth, along with increases in organic revenue. Moreover, the group’s performance in 2020 met management expectations coming into 2020 despite the impact of COVID-19. The group delivered a solid performance in all geographic markets that included high single-digit growth outside Canada. As COVID-19 became a reality, the group’s clients came to rely on Morneau more heavily to support their people through a very difficult time. Moreover, the government and public health authorities also deployed the group’s digital iCBT solution to help with the growing incidence of mental health issues related to the pandemic. The group is fortunate as their business was and remains resilient. In fact, the group’s iCBT business grew from CAD 0.7 million to more than CAD 8 million in 2020. 

• Risk Associated with Investment: The Company is exposed to a wide number of risks ranging from weakness in the job market, forex risks and protection of intellectual property right risks. Further, the Group operates in a highly competitive international market, and intense competition may lead to loss of client or price correction.

Key Events:

• Changing name from Morneau Shepell Inc. to LifeWorks Inc: On March 10, 2020, the Company announced its intention to change its name from Morneau Shepell Inc. to LifeWorks Inc. The decision follows an in-depth name evaluation process that included extensive market research with clients and prospects in Canada, United States, United Kingdom and Australia. The Company believes the proposed adoption of the new name would support its growth strategy in the global market for total wellbeing solutions. The proposed name change is being put forth to Shareholders as a Special Resolution at the Company’s Annual and Special Meeting of Shareholders on May 14, 2021. At that time, Shareholders would be asked to consider and, if deemed advisable, approve the Special Resolution concerning the proposed name change.

Financial Highlights: FY20

Source: Company Filing

• During FY20, the group reported solid performance despite challenging time like no other, with revenue grew 10.2%, or CAD 90.3 million, to CAD 979.2 million.
• In the same period, adjusted EBITDA increased by 9.6% to CAD 200.0 million, with the Adjusted EBITDA margin was essentially flat at 20.4% for the year.
• Throughout the year, the group strengthened its position as the global leader in the total wellbeing space and added 2.85 million people to its wellbeing platform.
• Free Cash Flow for the year ended December 31, 2020, increased by CAD 41.0 million to CAD 80.2 million compared to CAD 39.2 million for the same period in 2019. The increase was due to higher cash generated from operating activities, including change in operating working capital of CAD 60.9 million, lower finance costs paid of CAD 4.2 million, partially offset by higher capital expenditures of CAD 20.6 million and income taxes paid of CAD 3.5 million.
• On March 1, 2020, the company sold its benefits consulting business to HUB International Limited for a price of CAD 70.0 million, subjects to working capital adjustments, which were finalized during the third quarter. The gain recognized on the sale was CAD 39.8 million before tax.
• Cash provided by operating activities for the year ended December 31, 2020, increased by CAD 61.7 million to CAD 153.9 million compared to CAD 92.2 million in 2019. The increase was due to higher cash generated from operating activities of CAD 20.9 million, a decrease in operating working capital of CAD 40.1 million due to improved collections, and lower finance costs paid of CAD 4.2 million, partially offset by higher income taxes paid of CAD3.5 million.
• The long-term debt, net of debt issuance and financing costs decreased by CAD 58.6 million from CAD 470.5 million as of December 31, 2019, to CAD 411.9 million as of December 31, 2020.
• Current assets as of December 31, 2020, decreased by CAD 20.2 million to CAD 250.4 million from CAD 270.6 million as of December 31, 2019.

Q4FY20 Highlights

• During the three months ended on December 31, 2020, organic revenue was 4.4%. Overall, revenue growth of CAD 2.1 million or 0.8% versus the comparative period was primarily due to organic growth partially offset by the divestiture of its benefits consulting business in the first quarter of 2020.
• Adjusted EBITDA increased by CAD 3.0 million, or 6.2% to CAD 51.0 million, compared to CAD 48.0 million for the same period in 2019. The increase was primarily due to organic revenue growth and lower operating expenses, partially offset by the divestiture of benefits consulting business.
• Adjusted EBITDA margin was 20.4% versus 19.4% in the comparative period. The increase in margin was due to lower operating expenses during the quarter compared to the same period in the prior year.
• Adjusted EBITDA per share (basic) was CAD 0.73 compared to CAD 0.72 per share in Q4 2019.
• Profit for the period increased by CAD 8.2 million to CAD 10.8 million, compared to CAD 2.6 million in the same period last year. The increase was primarily due to higher adjusted EBITDA, lower finance costs and reduction in expenses related to adjusted items.
• Basic earnings per share for the period was CAD 0.15 compared to CAD 0.04 in the comparative period.

Top-10 Shareholders

Top-10 shareholders in the company held around 44.76% stake. Mackenzie Financial Corporation and BMO Asset Management Inc.  are among the largest shareholder in the company and carrying an outstanding position of 15.83% and 5.76%, respectively. The institutional ownership in “MSI” stood at 55.99%, and ownership of the strategic entities stood at 0.26%.

Source: Refinitiv (Thomson Reuters)

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:  Amid Challenging 2020, led by the outbreak of the novel virus, the group delivered a solid performance that featured revenue and profitability growth, along with increases in organic revenue.

The company’s 2020 performance met management expectations, despite the impact of COVID-19, producing solid performance in all geographic markets that included high single-digit growth outside Canada. Moreover, the company significantly bolstered its free cash flow position, with Free Cash Flow for the financial year ended December 31, 2020, nudged by 105% or CAD 41.0 million to CAD 80.2 million.

As COVID-19 became a reality, the clients came to rely on the company more heavily to support their people through a very difficult time. The governments and public health authorities also deployed Morneau’s digital iCBT solution to help with the growing incidence of mental health issues related to the pandemic.

Therefore, based on the above rationale and valuation, we recommend a “Buy” rating at the closing price of CAD 32.23 on March 19, 2021.  

1-year Price Chart (as on March 19, 2021). Source: Refinitiv (Thomson Reuters)

*Recommendation is valid at March 22, 2021 price as well.

Disclaimer

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