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

• Growing Recurring Revenue: Despite the uncertainty in 2020, the company kept moving forward and saw a strong performance across its annual recurring revenue. The group's consolidated revenue in 9MFY21 was CAD 761.0 million, up 4.3% from the previous equivalent period. We believe the company is continuously working closely with its clientele; thus, it witnessed an increase in presence and volumes, which is appreciable. 

Source: Company 

• Clocking Higher EBITDA: In Q3FY21, the firm reported a greater EBITDA of CAD 39.5 million, compared to CAD 33.8 million in the previous corresponding period, owing to decreased borrowing costs and lower depreciation and amortization expense. Due to lower interest rates, finance costs decreased by CAD 1.5 million, or 22.7% for the quarter.
  

• Free Cash Flows: Despite lower cash provided by operating activities of CAD 36.8 million for the three months ended September 30, 2021, due to unfavorable changes in working capital of CAD 17.9 million due to an increase in trade and other receivables, the company managed to generate CAD 18.2 million in free cash flows. In such difficult times, generating free cash flows is a remarkable feat.
  

• Investing in Technology to Drive Efficiency: For its organizational programs and AbilitiCBT, its market-leading iCBT solution, LWRK is utilizing its proprietary Abiliti platform. Through AbilitiCBT and non-occupational absence management solutions, the company addresses the complicated end of the continuum of care. It is also investing in digital product innovation and deploying artificial intelligence (AI) to boost profits and efficiency. This, we feel, this will strengthen the company's technological infrastructure, which is a significant benefit.
  

Risks associated with investment

Since, the company competes in a highly competitive market, it must adapt 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 Q3 2021 (in 000 of CAD)

Source: Company

• Revenue for the third quarter increased by CAD 5.8 million, or 2.4%, to CAD 246.1 million compared to CAD 240.3 million in Q3FY20. The increase was primarily due to organic growth from the Integrated Health Solutions business and iCBT services.
• The company's consolidated operating expenses in Q3FY21 stood at CAD 233.8 million compared to CAD 235.9 million in pcp.
• The company incurred lower finance costs of CAD 5.2 million against CAD 6.7 million in pcp.
• In the reported period, due to the above-stated reasons and no provision cost for sublease, LWRK recorded a net profit of CAD 8.0 million against a loss of CAD 2.1 million in pcp.
  

Valuation Methodology (Illustrative) EV to Sales Based

Stock recommendation

The company had a good third quarter, contributing to solid year-to-date results driven by constant currency organic growth in revenue. Client interest in the multi-modal platform approach to employee wellbeing is at an all-time high in fast-changing and developing wellbeing markets, where demand is robust, and the future is highly favorable, as seen by sales and pipeline. In addition, the company strengthened its position as a global leader in total wellbeing by increasing the number of people who use its LifeWorks platform, broadening the base of tech-enabled recurring revenues, and expanding into the high-potential digital health market where it is uniquely positioned. Therefore, based on the above rationale and valuation, we recommend a "Buy" rating at the closing price of CAD 25.44 on December 29, 2021.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached.

Technical Summary Analysis

One-Year Price Chart (as on December 29, 2021). Source: REFINITIV, Analysis by Kalkine Group

*The reference data in this report has been partly sourced from REFINITIV.

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