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Morneau Shepell PT Lifted To $13 By CIBC After Q1, 'Sector Performer' Retained

 May 16, 2012 02:56 PM


CIBC World Markets Inc. increased its price target on shares of Morneau Shepell Inc. (TSE:MSI) to $13 from $12.50, while retaining its "Sector Performer" rating.

After the company's first quarter results, the brokerage lowered its 2012 EPS estimate to $0.56 from $0.60 while raising its 2013 estimate to $0.73 from $0.67.

MSI reported solid Q1 results. Revenue increased 22% to $104 million, versus $96 million consensus estimate, and adjusted EBITDA was up 24% to $19.3 million or $0.40/share versus $18.1 million consensus estimate.

Organic growth in Q1 was impressive (17.5%). Normalized free cash flow was up 26% year-over-year ($13.2 million). CIBC estimates a payout ratio of 71%.

In Q1 MSI completed the acquisition of SBC Systems, a leading provider of employee benefits administration systems in the U.S., for $5.5 million. Management noted the addition of SBC helped win several large U.S. clients in the quarter, including City of Chicago and PF Chang's.

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MSI issued $75 million in convertible debentures in Q1, which was used to pay down its revolver, with the debt-EBITDA ratio on its revolver down to 2.0 times versus 2.9 times at the end of Q4 (covenants at 3.25 times). The brokerage believes excess free cash flow will be used to pay down debt and potentially for accretive acquisitions.

The brokerage continues to believe that MSI is well positioned for growth given trends in pension benefits outsourcing, and opportunities in the health management vertical and the U.S. market. CIBC retained its rating but increased the price target to reflect recent results.

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Morneau Shepell, formerly Morneau Sobeco Income Fund, provides human resource consulting and outsourcing services. Its solutions are designed to assist employers in managing the financial security, health and productivity of their employees.

MSI is trading up 0.95% at $11.70 on Wednesday.

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