Morneau Shepell Inc.

Mental Health Index™ shows an 11-point decline from the pre-pandemic benchmark of 75: Morneau Shepell Inc. is a human resources company that provides consulting and administrative services in four segments: well-being, administrative outsourcing, consulting, and absence management. As on 9 July 2020, the market capitalization of the company stood at ~CAD 2.14 billion. The company has recently released its monthly mental Health Index™ report, wherein it reported a consistent negative mental health score for the third consecutive month in Canada. The findings reveal a Mental Health Index™ score of -11, showing that Canadians continue to struggle with the uncertainty brought on by the pandemic despite entering new phases of reopening.

Increase in Revenue and EBITDA: During the first quarter ended 31 March 2020, the company delivered year-over-year growth of 18.7% in revenue to CAD 243 million and 5.8% in adjusted EBITDA to CAD 47.31 million with solid adjusted EBITDA margins of 19.5%. The increase is primarily due to the Mercer acquisition, net of the divestiture of benefits consulting business and strong organic growth in the United States. In the same time span, the company generated a profit of CAD 38.9 million as compared to CAD 8.7 million in Q1, 2019. The increase in profit is predominantly due to the gain on disposition of the Company's benefits consulting business.

Quarterly Financial Highlights (Source: Company Reports)

Key Risks: The company is exposed to a variety of risks which does not guarantee future performance. These risks include the ability to maintain profitability and manage growth, reliance on information systems and technology, reputational risk, dependence on key clients, reliance on key professionals and economic conditions.

Stock Recommendation: The company has launched a variety of important initiatives to support mental health and well-being. It also created and launched WellCan, which offers every Canadian access to a broad range of free resources to support their mental health and wellbeing. As per TSX, the stock of MSI is trading slightly above the average 52-weeks’ level but holds the potential for further growth. The stock of MSI gave a return of 3.33% in the past three months. On a (Trailing Twelve Months) TTM basis, the stock is trading at an EV/Sales multiple of 2.8x, lower than the industry average (Professional & Commercial Services) of 28.4x, and thus seems undervalued.  Considering the current trading levels, lower EV/Sales Multiple, unique business model and improved financial performance, we recommend a ‘Buy’ rating on the stock at the closing market price of CAD 31.44, up by 0.2231% on 9 July 2020.

MSI Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Boyd Group Services Inc.

BYD Completes Bought Deal Financing: Boyd Group Services Inc. (TSX: BYD) is a personal services company that provides auto body and auto glass repair services at its portfolio of facilities located across the United States and Canada. As on 9 July 2020, the market capitalization of the company stood at ~CAD 4.43 billion. The company has closed its previously announced bought deal financing consisting of 1,100,000 shares at a price of CAD 183.00 per share. The company intends to use the net proceeds of the offering to fund potential future acquisition opportunities and to further strengthen its balance sheet.

Quarterly Performance (For the Period Ended 31 March 2020): During the first quarter ended 31 March 2020, the company reported an increase of 12.6% in sales to CAD 628.4 million from CAD 557.9 million in the same period of 2019 and growth of 4% in adjusted EBITDA to CAD 81.4 million. However, the financial results were meaningfully impacted by the COVID-19 pandemic, with an estimated impact on sales, same-store sales, adjusted EBITDA; adjusted net earnings; and on adjusted net earnings per share.

Financial Highlights (Source: Company Reports)

Key Risks: The company is exposed to a variety of risks including pandemic risk & economic downturn; operational performance; acquisition risk; fluctuations in operating results and seasonality, etc. The company does not guarantee the dividend payment.

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)

EV/Sales Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The outbreak of the COVID-19 crisis has had a significant impact on Boyd's business, with reductions in demand in the range of 40% to 50% from normal levels. However, the company has taken various initiatives to move through this unprecedented period with resilience. As per TSX, the stock of BYD is inclined towards its 52-weeks’ trading levels of CAD 231.53 and holds the limited potential for growth. The stock of BYD gave a return of 28.25% in the past three months and a return of 5.01% in the last one month. We have valued the stock using the EV/Sales multiple based illustrative relative valuation method and arrived at a downside of the lower single digit (in percentage terms). Considering the current trading levels, volatility in returns and impact of COVID-19 on the company, we suggest investors to keep an eye on the business activities and wait for better entry levels. Hence, we give a watch stance on the stock at the closing market price of CAD 206.53, down by 0.99% on 9 July 2020.

BYD Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Disclaimer

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