Morneau Shepell Inc.

Morneau Shepell Inc. (TSX: MSI) is a human resources company that provides consulting and administrative services in four segments: well-being, administrative outsourcing, consulting, and absence management. 

Q1FY20 Financial highlights: MSI delivered a stellar quarterly number with considerable growth across its top line and bottom-line. The Company reported revenue of  CAD 243.04 million, reflecting an 18.7% y-o-y growth driven by strong organic growth in US and positive impact of the recent acquisition. Profit before income tax soared to  CAD 47.48 million, against CAD 12.41 million, thanks to a gain on divestiture amounting to CAD 39.84 million, while higher salaries, benefits & contractors, depreciation & amortization and a significantly higher other operating expense remained a drag. Adjusted EBITDA stood at CAD 47.32 million, as compared to CAD 44.72 million in the previous corresponding quarter, supported by cost efficiency from its Mercer acquisition. Profit for the period stood higher at CAD 38.91 million, as compared to CAD 8.66 million. Capital expenditure increased by CAD 6.3 million to CAD 16.4 million, due to the inclusion of expense related to Mercer integration.

Q1FY20 Income Statement Highlights (Source: Company Reports)

Valuation Methodology (Illustrative):  EV/Sales based Relative Valuation

Note: All forecasted figures and peers have been taken from Refinitiv (Thomson Reuters), NTM-Next Twelve Months

Stock Recommendation: The stock stood resilient and generated a ~12% return in the last one year. MSI is a leading technology-based HR services provider, which offers an integrated approach to employee well‐being through its cloud‐based platform. The group provides a wide range of software solutions required for full outsourcing for the administration of the employees. Amid the current challenging scenario, most of the businesses would be eager to cut their operating costs in order to improve the operational efficiencies. We believe the company has a unique line of offering and is well-positioned to capitalize on the opportunities coming from the industries. We have valued the stock using EV/ Sales based relative valuation approach. We have taken peers like Fiera Capital Corp (TSX: FSZ), TMX Group Ltd (TSX: X), Home Capital Group Inc (TSX: HCG) etc. and arrived at a target price offering double-digit upside potential (in % terms).  Hence, we recommend a ‘Buy’ rating on the stock at the closing price of CAD 31.91 as on May 15, 2020.

MSI One-Year Daily Price Chart, Source: Refinitiv (Thomson Reuters)

Aurinia Pharmaceuticals Inc.

Aurinia Pharmaceuticals Inc. (TSX: AUP) is a clinical-stage biopharmaceutical company which is engaged in the development and marketing of drugs, which are used for the treatment of patient those are impacted by serious diseases with a high unmet medical need. The Company is developing the investigational drug ‘voclosporin’, which will be used for the treatment of lupus nephritis, proteinuric kidney diseases, and dry eye syndrome. 

Current Highlights:

• The Company has filed NDA with the FDA and seeks for marketing approval for the use of voclosporin in the treatment of LN towards the end of the second quarter of FY20.

• AUP intends to conduct a pre-commercial activity including build-out of the organization for proper launch voclosporin, used for the treatment for LN, after the approval by the FDA.

Q1FY19 Financial Highlights: AUP declared its quarterly results, wherein the Company reported Licensing revenue of USD 0.030 million, stood in line with previous corresponding quarter. The Company reported a surge in research and development charges due to the higher expense associated with the NDA submission and related activities followed by the ongoing VOS Phase 2/3 dry eye trial and AURORA 2 extension trial. Corporate, administration and business development expenses increased significantly to USD 11.06 million against USD 3.90 million in pcp due to an investment required for the launch of voclosporin as a treatment for LN which is planned for early 2021 along with additional expenses incurred due to extra staff-hiring. Loss before income taxes widened to USD 16.77 million, from USD 12.41 million in Q1FY19. The Company exited the quarter with a cash and cash equivalent of CAD 274.21 million along with a total asset of USD 314.97 million.

Q1FY20 Income Statement Highlights (Source: Company Reports)

Stock Recommendation: The stock of AUP surged ~249% in the last six months as the company offers a promising product line, and the market expects positive approval from USFDA. The company intends to enhance voclosporin renal franchise with additional renal indications and the exploitation of the drug in novel formulations for the treatment of autoimmune related disorders. Furthermore, the company is also indulged for the development of VOS, used for the treatment of DES. We believe the success of voclosporin could generate a strong amount of cash flows for the company in the coming years and drive its stock significantly higher. However, there is a significant amount of risk associated with it, including regulatory approval and patent protection which could wipe out the value for shareholders. The stock has given an exuberant return in the recent past and trading above its 200 days simple moving (SMA) average of CAD 16.51. Hence, based on above-mentioned reasons, we recommend a ‘Speculative Buy’ rating on to the stock at the closing market price of CAD 24.24 as on May 15, 2020.

AUP One-Year Daily Price Chart, Source: Refinitiv (Thomson Reuters)

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