LifeWorks Inc. (TSX: LWRK) is a Canadian firm that delivers personalized, digital health solutions and a variety of features to help employees when and how they need it. It provides clients with technology-enabled solutions that assist them enhance their people resources' mental, physical, social, and financial well-being.

Key highlights

• Steady performance from the operating segments: The Company has four operational sectors that correspond to its four primary lines of business. Year-to-date sales climbed by CAD 40.1 million, or 4.1%, to CAD 1,019.3 million from CAD 979.2 million in 2020. The rise was largely attributable to 3.6% organic growth driven by IHS, Health and Productivity, and AS growth, which was slightly offset by negative foreign exchange movement.
  

• Higher normalized free cash flow: The company reported lower cash provided by operating activities of CAD 141.0 million in FY 2021 compared to CAD 153.9 million in pcp, due to increased expenditures including restructuring expenses and ERP implementation costs, however, it generated increased normalized free cash flow of CAD 107.8 million compared to CAD 101.1 million in pcp. In such challenging time, producing free cash flows is a great accomplishment.

Source: Company Filing, Analysis by Kalkine Group

• Riding on acquisition wave: During 2021, the Company continued to execute on its growth strategy by acquiring SMG Health Pty Ltd. in the first quarter and Ascender B.V. in the third quarter, bringing together an unrivaled range of services for achieving complete mental, physical, social, and financial wellbeing for people in Australia and the Netherlands. Furthermore, it completed the purchase of Breaking Free Group, a worldwide firm located in the United Kingdom and a leading supplier of behavioral health Software as a Service ("SaaS") solutions for evidence-based substance use intervention, on January 24, 2022. We anticipate that these purchases will help the firm generate more recurring revenue.

• An income play: The Company has a strong track record of dividend payout, demonstrating its resilience and substantial cash flow production. It recently declared a CAD 0.065 per share monthly dividend for the month of March 2022, to be paid on April 18, 2022. Furthermore, at the stock's final closing price of CAD 21.56 on April 1, 2022, it gave a solid dividend yield of 3.945 percent, which seemed respectable given the present macroeconomic and interest rates.
  

Risks associated with investment

Since, the company competes in a highly competitive market, it must adapt to and compete with rapid changes in technology, industry standards, and client preferences in order to stay afloat. This could result in significant input costs, which could adversely impact its profit margins.

Financial overview of FY 2021

Source: Company Filing

• Revenue for the company in FY 2021 increased by CAD 40.1 million, or 4.1%, to CAD 1,019.3 million compared to CAD 979.2 million in FY 2020. The increase was primarily due to organic growth.
• The company's consolidated operating expenses in the reported period stood at CAD 1,035.3 million compared to CAD 922.6 million in pcp.
• The company incurred lower finance costs at CAD 22.5 million in FY 2021, against CAD 26.8 million in pcp.
• LWRK incurred a net loss of CAD 24.0 million in the reporting period, compared to a profit of CAD 55.9 million in pcp, owing to higher operational expenditures and the after-tax effect of accelerated amortization recognized in relation to the Shepell trade name of CAD 51.4 million.

Valuation Methodology (Illustrative) EV to Sales Based

Analysis by Kalkine Group 

Stock recommendation

The company had a strong year, with record sales contributing to 6.1% constant currency organic growth, and ended FY 2021 strongly, with adjusted EBITDA margins improving in Q4 after declining earlier in the year due to temporary supply-chain issues in the global counsellor network, which the company is now addressing. Furthermore, the firm is riding the acquisition wave, and we believe that these acquisitions will help the company generate more recurring revenues, which is a significant plus.

The company is stepping confidently into 2022 as a strong and growing company that’s well-positioned at a time when global demand for workplace mental health solutions is rapidly increasing, particularly for support on best-in-class platforms combining digital and in person solutions. Therefore, based on the above rationale and valuation, we recommend a "Speculative Buy" rating on the stock at the last closing price of CAD 21.56 as on April 1, 2022. Additionally, the markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

One-Year Technical Price Chart (as on April 1, 2022). Source: REFINITIV, Analysis by Kalkine Group 

Technical Analysis Summary

Disclaimer

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