Morneau Shepell Inc.

Morneau Shepell Inc. (TSX: MSI) is a leading provider of technology-enabled HR services that deliver an integrated approach to employee wellbeing through our cloud-based platform. The Company provides world-class solutions to its clients to support the mental, physical, social and financial wellbeing of their people. 

Q1FY20 Financial highlights: MSI impresses with its quarterly numbers and reported an exuberant bottom-line growth, due to a gain from the disposition of the Company's benefits consulting business. Morneau Shepell reported revenue of CAD 243.0 million, reflecting a y-o-y growth of 18.7% owing to a positive impact from acquisitions of Mercer coupled with strong organic growth from the United States. EBITDA stood higher at CAD 47.3 million, as compared to CAD 44.7 million in Q1FY19, while EBITDA margin stood at 19.5% against 21.8% in pcp. During Q1FY20, the Company generated Normalized Free Cash Flow of CAD 20.9 million against CAD 24.0 million in the previous corresponding quarter. The group reported a profit of CAD 38.9 million for the quarter, compared to CAD 8.7 million in Q1FY19. 

Q1FY20 Income Statement Snapshot (Source: Company Reports)

Risks: The services, which are offered by the company are majorly for the organizations and corporate houses. A significant reduction in the corporate income might act inversely for the company. Further, cost-cutting initiatives might result in discontinuation of the existing services.

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

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

Stock Recommendations: The stock of MSI corrected ~6% so far this year, amidst a huge selling pressure due to weak investor’s sentiment across the global equity markets. The Company remained fully-operation during the pandemic and was least impacted materially due to the ongoing pandemic. Being a technology-based HR services provider, the group 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. We expect the demand for the group’s offerings to increase in the current challenging environment as most of the businesses would be focusing on cost efficiencies in order to support the bottom line. We believe the Company has a unique line of offering and is well-positioned to capitalize on the opportunities coming from the industries. Further, the group is likely to benefit from the expected synergies from the recent acquisitions. Meanwhile, to enhance the current liquidity, the Company enhanced its Credit Facility Agreement by CAD 100 million to support the near-term working capital requirements. We have valued the stock using Price to Sales value-based relative valuation method and have arrived at a target upside of lower single-digit (in percentage terms). We have taken peers like Fiera Capital Corp (TSX: FSZ), Equitable Group Ltd (TSX: EQB), Home Capital Group Inc (TSX: HCG) etc., as a peer group. Hence, we recommend a ‘Buy’ rating on the stock at the closing market price of CAD 31.66 on June 19, 2020.

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

Richelieu Hardware Ltd 

Richelieu Hardware Ltd (TSX: RCH) is engaged in importing, manufacturing, and distributing specialty hardware and complementary products. The company offers products which are used in home and office furnishing such as storage and closet, kitchen and bathroom cabinet, door and window, residential and commercial woodworkers etc.

Due to the adverse impact from COVID 19 pandemic, the company took prompt measure to retain preservation and cancelled its dividend payment program.

Q1FY20 Financial Highlights: Richelieu Hardware reported revenue of CAD 249.40 million, reflecting a y-o-y growth of 10.2% owing to a positive impact from acquisitions coupled with internal growth. From the Canada geography, the Group derived a 9% increase in sales to CAD 156.7 million while the United States reported sales of USD 70.3 million, up 13.3% over pcp. The quarter was marked by an increase in sales and coupled with some cost control measures, which has led to margin expansion. EBITDA margin stood 10%, against 9.2% in the previous corresponding quarter. EBITDA for the first quarter of FY20 grew by 18.9% on y-o-y basis to CAD 24.9 million. The quarter was characterized by a surge in amortization expenses and financial costs. The increase in the amortization costs was primarily attributable to an increase in intangibles and right-to-use asset relating primarily to the recent acquisitions. The company reported improved net earnings of CAD 11.79 million, as compared to CAD 9.93 million in the previous corresponding quarter.

Cash generated from operating activities stood at CAD 8.78 million, improved from a negative CAD 10.61 million in the prior corresponding period. As on February 29, total debt stood at CAD 11.6 million, while total assets came in at CAD 696.01 million.

Q1FY20 Income Statement Highlights (Source: Company Reports)

Risks: Due to the COVID 19 impact, the Company witnessed a series of unprecedented setbacks since the end of March 2020, resulted in declining cash flow on account of soft demand. The Company caters several corporate clients, and due to the closure of several offices, the demand is likely to remain challenging in the near-term.

Stock recommendation: The stock stood resilient in the recent past, amidst a strong selling spree persists across the broader market. The stock appreciated ~25% in the last one year and closed above its 200-days simple moving average of CAD 26.62. The Group reported a decent quarter aided by the recent acquisitions. RCH offers a unique service concept and has a diversified client base across the regions it operates. Going forward, the Group intend to continue its proven business strategies which enabled the Company to build a large and diversified client base and to effectively support the customers in their development and projects. We expect, the demand to revive in the coming quarter driven by easing of current lockdown scenario and recommencing of several corporate activities. The stock is trading near the upper band of its 52-week price range of CAD 20.52 and CAD 29.83. On the valuation front, the RCH stock is trading at a forward Price to Earnings multiple of 29.2x, which is higher industry (Household Goods) average of 27.5x. Hence, we recommend a ‘Watch’ stance on the stock at the closing market price of CAD 28.87 on June 19, 2020.

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

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