Acquisition and Strength in the Base Business Supports Growth: Morneau Shepell Inc. (TSX:MSI) is one the Canada’s leading human resources company which provides consulting and administrative services. The company operates through the four operating segments including with well-being, consulting, administrative outsourcing, and absence management. The company generates majority of its revenues from the well-being segment through which it offers educational and counselling services with Canada and United States as its primary market. It also offers services related to pension, attendance, and work compensation through its other business segments.

On March 20, 2020, Morneau Shepell announced a monthly cash dividend of CAD 0.065 per share for the month of March.

Q4FY19 Highlights: Morneau Shepell ended FY19 on a strong note with stellar financial performance in the fourth quarter. The company posted revenues of CAD 247.5 million, up 23.3% y-o-y on the back of benefits from the Mercer acquisition. Notably, Mercer acquisition drove 18.2% growth in the top line. Further, the company’s base business also remained strong and generated organic growth of 5.1%, reflecting improvement in the administrative solutions, health & productivity solutions, and well‐being solutions segments. Salaries, benefits and contractor expenses jumped 24.4% y-o-y to CAD 170.0 million, driven by acquisitions and business growth. Adjusted EBITDA increased 34.7% y-o-y to CAD 48.0 million on account Mercer acquisition. Adjusted EBITDA margin expanded 160 basis points to 19.4%. Finance costs jumped 58.9%, reflecting increased debt related to the funding of Mercer acquisition. Morneau Shepell posted earnings of CAD 0.04 per share in the fourth quarter as compared to CAD 0.05 in Q4FY19. Higher operating expenses and increased finance costs took a toll on its bottom line.

The company’s normalized free cash flow stood at CAD 17.6 million, down from CAD 18.3 million in Q4FY18 as higher capital expenditures and finance costs remained a drag.

Financial Highlights (Source: Company Sources)

Valuation Methodology: EV/EBITDA Multiple Approach 

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

Stock recommendation: Morneau Shepell stock has been resilient to the recent stock market carnage. The stock is down marginally on a YTD basis as compared to the double-digit decline in the broader markets. We remain upbeat on Morneau Shepell stock, thanks to the company’s strong cash flow generating capabilities and consistent margins. Further, strong recurring revenues (about 97% to 98% of the total revenues) make it an attractive bet. The stock is currently trading above its 200 SMA level. Currently, the stock is currently trading at a forward EV/EBITDA multiple of 13.8x which is higher than the industry average. The higher premium is justified owing the nature of the business which company is operating. We expect the multiple to expand further in coming quarters. We have valued the MSI stock using the EV/EBITDA based relative valuation method with a target multiple of 14.5x, and arrived at a target price which implies a potential upside in low double-digits. Hence, we recommend a “Buy” on the MSI stock at the Closing market price of CAD 33.13, up 3.1% as on April 17, 2020.

 MSI Daily Price Chart (Source: Thomson Reuters)

Disclaimer

The advice given by Kalkine Canada Advisory Services Inc. and provided on this website is general information only and it does not take into account your investment objectives, financial situation and the particular needs of any particular person. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. The website www.kalkine.ca is published by Kalkine Canada Advisory Services Inc. The link to our Terms & Conditions has been provided please go through them. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations later.