Morneau Shepell

Morneau Shepell (TSX: MSI) is a human resources company that provides consulting and administrative services in four segments: well-being, administrative outsourcing, consulting, and absence management. The well-being segment, which produces the majority of income, offers educational and counselling services aimed at supporting employee and family needs. The company generates most of its revenue in the United States and Canada.

Recent Updates:

• The Management declared a monthly cash dividend of CAD 0.065 per share, payable on September 15, 2020.
• The Company has opened its crisis support hotline, which offers professional emotional support to individuals across Gulf of Mexico. The above support is intended to individuals who are dealing with the impacts of Tropical Storm Marco and Hurricane Laura.

Q2FY20 Financial Highlights: Morneau Shepell announced its quarterly results, wherein the company reported revenue of CAD 246.175 million, which came higher than CAD 212.666 million recorded in the previous corresponding period (pcp). The increase was driven by the positive impact from the acquisition of Mercer in 2019 combined with improved performance from health and defined benefit pension plan administration business within the United States, partially offset by the divestiture of the company's benefits consulting business. Adjusted EBITDA stood at CAD 52.075 million, against CAD 45.882 million in pcp while adjusted EBITDA margin stood at 21.2%, slightly lower than 21.6% recorded a year ago. Profit for the period stood at CAD 8.258 million against CAD 6.329 million a year ago. Normalized Free Cash Flow, during the second quarter, came at CAD 30.844 million as compared to CAD 27.618 million in pcp, aided by cash provided by operating activities.

Q2FY20 Income Statement Highlights (Source: Company Reports)

Risk: The company’s profitability and growth are highly dependent on information systems and technology, goodwill, business from key clients, reliance on key professionals and economic conditions. Change in any above factors might hinder the company’s performance.

Valuation Methodology: EV to Sales Based (Illustrative)

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

Stock Recommendation: The stock corrected ~16% so far this year. The company is a provider of technology-enabled HR services that deliver an integrated approach to employee wellbeing through the cloud-based platform. The company is using cloud technology, and the prospect is enormous, looking at the acceptability of the technology among the organizations. The business is more or less resilient in nature and is expected to retain its top-line in the coming days. The company has a solid product line, and the management is confident of meeting the changing customer-requirements in the coming days, which is a key positive and augers well for customer-retention. The period was marked by the highest annual client satisfaction and employee engagement, which is encouraging. The company offers a unique range of products, and the recent acquisition has enhanced the company’s market share across new businesses. Furthermore, the company has sold its Consulting business in order to improve its overall financial flexibility. The management stated that all operations and systems are performing at pre-pandemic levels. We have valued the stock using EV to Sales based relative valuation method and have arrived at a target upside of double-digit (in percentage terms). For the said purposes, we have considered industry (Professional & Commercial Services) average on NTM basis. Considering the aforesaid facts, current price levels, we recommend a ‘Buy’ rating on the stock at the closing market price of CAD 28.55 on September 3, 2020.

MSI Daily Technical Chart (Source: Refinitiv, 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.