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.

Q2FY20 Financial Highlights: MSI announced its quarterly results, wherein the company posted a 15.8% y-o-y jump in its to revenue of CAD 246.2 million, aided by the positive impact from the acquisition of Mercer in 2019 coupled with improved performance from health and defined benefit pension plan administration business across the United States, partially offset by the divestiture of the company's benefits consulting business. The company reported a 13.5% surge in the adjusted EBITDA to CAD 52.1 while adjusted EBITDA margin fell marginally to 21.2%, as compared to 21.6% in the previous corresponding period (pcp). Profit for the period stood at CAD 8.3 million as compared to a profit of CAD 6.3 million, a year ago. Normalized Free Cash Flow, during the second quarter, stood at CAD 30.8 million, as compared to CAD 27.6 million in Q2FY19 driven by higher cash provided by operating activities. On a year to date basis, the company's operation witnessed the continuation of strong momentum as well, wherein revenue was up by 17.2% y-o-y to CAD 489.2 million, while adjusted EBITDA jumped 9.7% y-o-y to CAD 99.4 million.

Q2FY20 Financial Highlights (Source: Company Reports)

Risk: The company is exposed to a variety of risks which does not guarantee future performance. These risks include the ability to maintain profitability and manage growth, reliance on information systems and technology, reputational risk, dependence on key clients, reliance on key professionals and economic conditions.

Valuation Methodology: P/E Based (Illustrative)

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

Stock Recommendation: The stock fell ~8% and ~13% in the last three months and six-months, respectively. 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. The group stated that the sales pipeline remains strong, which is a reflection of the confidence clients have in its solutions. We valued the stock using the Price to Earnings based relative valuation approach and arrived at a target price, which suggests a double-digit upside potential (in % terms). For the said purpose, we have considered industry (Professional & Commercial services) average on NTM basis. Hence, considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock at the closing market price of CAD 30.51 on August 07, 2020.

MSI Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Spin Master Corp.

Spin Master Corp. (TSX: TOY) is Canada’s leading children's entertainment company. The Company has a strong portfolio of traditional and digital toys, games, products and entertainment properties. The Company has well-recognized brands like PAW Patrol, Bakugan, Kinetic Sand, Air Hogs, Hatchimals and GUND, and is the toy licensee for other popular properties. 

On August 04, 2020, the Company collaborated and pact a licensing partnership with Feld Entertainment Inc as the new global master toy partner for Supercross, the premier off-road motorcycle racing series, primarily for the top professional riders across the world.

Q2FY20 Financial Highlights:  TOY announced its second quarter results, wherein total revenue stood at USD 281.1 million, reflecting a slide of 12.4% on y-o-y basis. The decrease was primarily attributable to decline in the Pre-School & Girls, Boys Action & Construction and Remote Control & Interactive Characters products, partially offset by growth in Activities, Games & Puzzles and Plush, as well as Outdoor. Gross profit plunged to USD 118.2 million, representing a slide of 28.1% on y-o-y basis, due to a lower income combined with a higher cost of sales. The Company reported a loss before income tax of USD 12.8 million, as compared to a profit of USD 13 million in the previous corresponding period, due to a lower gross profit combined with higher finance expense and slightly higher depreciation expense, partially offset by lower selling, marketing, distribution and product development expense. The decline in marketing expense was primarily due to reduced media marketing, lower experiential marketing and trade show cancellations as a result of COVID-19. However, the decline was partially offset by a surge in influencer and e-commerce marketing expenditures. Net loss was posted at USD 14.9 million, as compared to a net income of USD 10.2 million in the previous corresponding period (pcp).

Q2FY20 Income Statement Highlights (Source: Company Reports)

Risk: A further outbreak of COVID-19 may pose a various risk to the group, such as lower demand, supply chain disruption, and labor shortage etc. All of these might impact the financial performance of the company.

Valuation Methodology: Price to Cash Flow Based (Illustrative)

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

Stock Recommendation:  The stock of TOY fell ~15% and ~30% in the last six months and nine months, respectively. The Company develops and manufactures children's toys, and the demand is directly related to the population of kids, and we believe, the sector is likely to maintain a stable demand. However, the demand for premium pricing toys might witness a glitch, given the current consumer sentiment. The group is focusing on innovation using its global internal and external research and development network and also developing evergreen global entertainment and digital toys properties. The group will be focusing on increasing international sales in developed and emerging markets and would be leveraging the Company's global platform through strategic acquisitions. We have valued the stock using the P/CF based relative valuation approach and arrived at a target price, which suggests a double-digit upside potential (in % terms). For the said purpose, we have considered Corus Entertainment Inc, Transcontinental Inc and Quebecor Inc, etc., as a peer group. Hence, considering the aforesaid facts, current price movement, we recommend a 'Buy' rating on the stock at the closing market price of CAD 26.68 on August 07, 2020.

TOY Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Disclaimer

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