LifeWorks Inc

LifeWorks Inc (TSX: LWRK) is engaged in delivering technology-enabled solutions that help clients support the total wellbeing of their people and build organizational resiliency. Its solutions span employee and family assistance, health and wellness, recognition, pension and benefits administration, retirement consulting, actuarial and investment services. 

Key highlights 

• Rebranding itself: Following an in-depth assessment process and in accordance with its vision and aspirations, the Company recently changed its name from Morneau Shepell Inc. to LifeWorks Inc. While the Morneau Shepell name has served the firm well for many years, the LifeWorks brand represents the firm's leadership position in Total Wellbeing as well as its overarching goal of helping lives while also enhancing business. On the TSX, the Company's shares are now traded under the new ticker "LWRK."

• Record-high sales pipeline: In the first quarter of 2021, the Company covered 14.3 million direct lives, with 5.4 million of those now on its wellbeing platform. The firm finished the quarter with a record-high sales pipeline, indicating that its approach is paying off as it works to establish itself as a global leader in holistic wellbeing.

• Increase in free cash flow: In Q1 2021, the company reported higher Free Cash Flow, increased by CAD 23.4 million to CAD 36.6 million compared to CAD 13.2 million in the previous corresponding period. This increase was primarily due to an increase in cash provided by operating activities of CAD 28.2 million, offset by increased capital expenditures of CAD 4.8 million.

• Steady dividend distribution: The company reported a consistent dividend distribution in the recent past, backed by stable cash flows, which is a key positive. Recently, the group paid a monthly dividend of CAD 0.065 per common share on June 15, 2021.
  

Financial overview of Q1 2021 (In thousands of Canadian dollars)

Source: Company

• In Q1 2021, the company’s operating revenue increased by CAD 14.1 million, or 5.8%, to CAD 257.1 million compared to CAD 243.0 million in Q1 2020. The increase was primarily due to strong organic growth of 7.1%, mainly from the Wellbeing and Health and Productivity Solutions lines of business, partially offset by the divestiture of its benefits consulting business.
• Total operating expenses increased to CAD 237.6 million, against CAD 227.9 million in pcp, where salaries and benefits grew to CAD 176.8 million V/s CAD 164.3 million in Q1 2020.
• Profit before income tax for the reported period stood at CAD 14.0 million compared to CAD 47.4 million in pcp. The company clocked gain on business divesture in Q1 2020 worth CAD 39.8 million.
• Net profit stood at CAD 10.1 million compared to CAD 38.9 million in pcp. The decline was mainly due to gain on business divesture, which the company booked in pcp.
  

Risks associated with investment

The company operates in a highly competitive market, and hence to remain afloat within the industry, the company must adopt and compete with the rapid changes in technology, industry standards and client preferences. This might lead to higher input cost, which might impact the margin. 

Valuation Methodology (Illustrative): EV to Sales 

Stock recommendation

For the Company, it was a solid quarter to start the year driven by accelerating growth of its technology-enabled product suite, increased uptake of Total Wellbeing, adoption of digital mental health solutions and additional services added to the platform such as telemedicine. In the first quarter, the Company had excellent organic growth of 7.1%, with overall sales increasing 5.8% to CAD 257.1 million and adjusted EBITDA increasing 11.5% to CAD 52.8 million. Furthermore, the group's cash flows grew by CAD 23.4 million to CAD 36.6 million, which is a significant improvement. Therefore, based on the above rationale and valuation, we recommend a "Buy" rating on the stock at the closing price of CAD 31.98 on June 18, 2021. We have considered Barrett Business Services Inc, Kforce Inc, etc., as the peer group for the comparison.

One-Year Price Chart (as on June 18, 2021). Source: Analysis by Kalkine Group

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

Disclaimer

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