Intrinsic value of Morneau Shepell Inc. - MSI

Previous Close

$22.54

  Intrinsic Value

$26.87

stock screener

  Rating & Target

hold

+19%

Previous close

$22.54

 
Intrinsic value

$26.87

 
Up/down potential

+19%

 
Rating

hold

We calculate the intrinsic value of MSI stock by summing up the current values of future distributable cash flows generated by the company and dividing the sum by the number of outstanding shares. As such, the intrinsic value calculation depends entirely on projections. The more accurate your projections of the company's performance are - the more reliable is the intrinsic value calculation result. Please make sure to check the stock valuation input data below and adjust it if necessary. The quality of the output (intrinsic valuation result) is only as good as the quality of the input. See also DISCLAIMERS.

STOCK VALUATION INPUT DATA

Revenue (in 2016), $M
Initial revenue growth rate, %
Terminal revenue growth rate, %
Revenue decline factor
Initial discount rate, %
Discount rate multiplier
Variable cost ratio, %
Fixed operating expenses, $M
Interest rate on debt, %
Effective corporate tax rate, %
Production assets / Revenue, %
Life of production assets, yrs
Working capital / Revenue, %
Revenue / Adjusted assets
Adjusted equity ratio
Cash flow adjustment, % of Revenue
Book value of equity, $M
Shares outstanding, mln
Market capitalization, $bln 1.2

 

FINANCIAL STATEMENTS FORECAST and PRESENT VALUE CALCULATION

Fiscal year
2016(a)
   2017
   2018
   2019
   2020
   2021
   2022
   2023
   2024
   2025
   2026
   2027
   2028
   2029
   2030
   2031
   2032
   2033
   2034
   2035
   2036
   2037
   2038
   2039
   2040
   2041
   2042
   2043
   2044
   2045
   2046

INCOME STATEMENT

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue growth rate, %
  4.41
  8.10
  7.79
  7.51
  7.26
  7.03
  6.83
  6.65
  6.48
  6.33
  6.20
  6.08
  5.97
  5.88
  5.79
  5.71
  5.64
  5.57
  5.52
  5.47
  5.42
  5.38
  5.34
  5.31
  5.27
  5.25
  5.22
  5.20
  5.18
  5.16
  5.15
Revenue, $m
  592
  640
  690
  742
  795
  851
  910
  970
  1,033
  1,098
  1,166
  1,237
  1,311
  1,388
  1,469
  1,553
  1,640
  1,731
  1,827
  1,927
  2,031
  2,141
  2,255
  2,374
  2,500
  2,631
  2,768
  2,912
  3,063
  3,221
  3,387
Variable operating expenses, $m
 
  278
  298
  317
  338
  360
  382
  405
  430
  455
  481
  476
  505
  534
  565
  597
  631
  666
  703
  741
  782
  824
  868
  914
  962
  1,012
  1,065
  1,121
  1,179
  1,239
  1,303
Fixed operating expenses, $m
 
  293
  300
  308
  316
  324
  332
  340
  348
  357
  366
  375
  385
  394
  404
  414
  425
  435
  446
  457
  469
  480
  492
  505
  517
  530
  543
  557
  571
  585
  600
Total operating expenses, $m
  539
  571
  598
  625
  654
  684
  714
  745
  778
  812
  847
  851
  890
  928
  969
  1,011
  1,056
  1,101
  1,149
  1,198
  1,251
  1,304
  1,360
  1,419
  1,479
  1,542
  1,608
  1,678
  1,750
  1,824
  1,903
Operating income, $m
  53
  68
  92
  116
  142
  168
  196
  225
  255
  286
  319
  386
  422
  460
  499
  541
  584
  630
  678
  728
  781
  837
  895
  956
  1,021
  1,088
  1,160
  1,235
  1,313
  1,396
  1,484
EBITDA, $m
  88
  118
  142
  168
  195
  223
  252
  283
  315
  348
  383
  419
  457
  497
  539
  583
  629
  677
  727
  780
  836
  894
  956
  1,020
  1,088
  1,159
  1,234
  1,313
  1,396
  1,483
  1,575
Interest expense (income), $m
  0
  9
  10
  11
  12
  14
  15
  16
  18
  19
  21
  23
  24
  26
  28
  30
  32
  34
  36
  39
  41
  44
  46
  49
  52
  55
  58
  62
  65
  69
  73
Earnings before tax, $m
  38
  60
  82
  105
  129
  154
  181
  208
  237
  267
  298
  363
  398
  434
  471
  511
  552
  596
  641
  689
  740
  793
  848
  907
  968
  1,033
  1,101
  1,173
  1,248
  1,328
  1,411
Tax expense, $m
  12
  16
  22
  28
  35
  42
  49
  56
  64
  72
  81
  98
  107
  117
  127
  138
  149
  161
  173
  186
  200
  214
  229
  245
  261
  279
  297
  317
  337
  358
  381
Net income, $m
  26
  44
  60
  77
  94
  113
  132
  152
  173
  195
  218
  265
  290
  317
  344
  373
  403
  435
  468
  503
  540
  579
  619
  662
  707
  754
  804
  856
  911
  969
  1,030

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $m
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total assets, $m
  774
  837
  902
  969
  1,040
  1,113
  1,189
  1,268
  1,350
  1,436
  1,525
  1,617
  1,714
  1,815
  1,920
  2,029
  2,144
  2,263
  2,388
  2,519
  2,655
  2,798
  2,947
  3,104
  3,268
  3,439
  3,619
  3,807
  4,004
  4,211
  4,427
Adjusted assets (=assets-cash), $m
  774
  837
  902
  969
  1,040
  1,113
  1,189
  1,268
  1,350
  1,436
  1,525
  1,617
  1,714
  1,815
  1,920
  2,029
  2,144
  2,263
  2,388
  2,519
  2,655
  2,798
  2,947
  3,104
  3,268
  3,439
  3,619
  3,807
  4,004
  4,211
  4,427
Revenue / Adjusted assets
  0.765
  0.765
  0.765
  0.766
  0.764
  0.765
  0.765
  0.765
  0.765
  0.765
  0.765
  0.765
  0.765
  0.765
  0.765
  0.765
  0.765
  0.765
  0.765
  0.765
  0.765
  0.765
  0.765
  0.765
  0.765
  0.765
  0.765
  0.765
  0.765
  0.765
  0.765
Average production assets, $m
  267
  288
  310
  334
  358
  383
  409
  437
  465
  494
  525
  557
  590
  625
  661
  699
  738
  779
  822
  867
  914
  963
  1,015
  1,068
  1,125
  1,184
  1,246
  1,310
  1,378
  1,450
  1,524
Working capital, $m
  64
  72
  78
  84
  90
  96
  103
  110
  117
  124
  132
  140
  148
  157
  166
  175
  185
  196
  206
  218
  230
  242
  255
  268
  282
  297
  313
  329
  346
  364
  383
Total debt, $m
  250
  283
  318
  354
  391
  430
  471
  513
  556
  602
  649
  699
  750
  803
  859
  918
  979
  1,042
  1,109
  1,178
  1,251
  1,327
  1,406
  1,489
  1,576
  1,668
  1,763
  1,863
  1,968
  2,078
  2,193
Total liabilities, $m
  412
  445
  480
  516
  553
  592
  633
  675
  718
  764
  811
  861
  912
  965
  1,021
  1,080
  1,141
  1,204
  1,271
  1,340
  1,413
  1,489
  1,568
  1,651
  1,738
  1,830
  1,925
  2,025
  2,130
  2,240
  2,355
Total equity, $m
  362
  392
  422
  454
  487
  521
  556
  593
  632
  672
  714
  757
  802
  849
  898
  950
  1,003
  1,059
  1,118
  1,179
  1,243
  1,309
  1,379
  1,453
  1,529
  1,609
  1,694
  1,782
  1,874
  1,971
  2,072
Total liabilities and equity, $m
  774
  837
  902
  970
  1,040
  1,113
  1,189
  1,268
  1,350
  1,436
  1,525
  1,618
  1,714
  1,814
  1,919
  2,030
  2,144
  2,263
  2,389
  2,519
  2,656
  2,798
  2,947
  3,104
  3,267
  3,439
  3,619
  3,807
  4,004
  4,211
  4,427
Debt-to-equity ratio
  0.691
  0.720
  0.750
  0.780
  0.800
  0.830
  0.850
  0.860
  0.880
  0.900
  0.910
  0.920
  0.930
  0.950
  0.960
  0.970
  0.980
  0.980
  0.990
  1.000
  1.010
  1.010
  1.020
  1.030
  1.030
  1.040
  1.040
  1.050
  1.050
  1.050
  1.060
Adjusted equity ratio
  0.468
  0.468
  0.468
  0.468
  0.468
  0.468
  0.468
  0.468
  0.468
  0.468
  0.468
  0.468
  0.468
  0.468
  0.468
  0.468
  0.468
  0.468
  0.468
  0.468
  0.468
  0.468
  0.468
  0.468
  0.468
  0.468
  0.468
  0.468
  0.468
  0.468
  0.468

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  26
  44
  60
  77
  94
  113
  132
  152
  173
  195
  218
  265
  290
  317
  344
  373
  403
  435
  468
  503
  540
  579
  619
  662
  707
  754
  804
  856
  911
  969
  1,030
Depreciation, amort., depletion, $m
  35
  49
  51
  52
  54
  55
  57
  58
  60
  62
  64
  33
  35
  37
  40
  42
  44
  47
  49
  52
  55
  58
  61
  64
  67
  71
  75
  78
  83
  87
  91
Funds from operations, $m
  40
  93
  110
  129
  148
  168
  189
  210
  233
  257
  281
  299
  326
  354
  384
  415
  447
  482
  518
  555
  595
  636
  680
  726
  774
  825
  878
  935
  994
  1,056
  1,121
Change in working capital, $m
  -27
  5
  6
  6
  6
  6
  7
  7
  7
  7
  8
  8
  8
  9
  9
  9
  10
  10
  11
  11
  12
  12
  13
  14
  14
  15
  16
  16
  17
  18
  19
Cash from operations, $m
  67
  88
  105
  123
  142
  161
  182
  203
  226
  249
  274
  291
  317
  345
  375
  405
  437
  471
  507
  544
  583
  624
  667
  713
  760
  810
  863
  918
  977
  1,038
  1,103
Maintenance CAPEX, $m
  0
  -16
  -17
  -19
  -20
  -21
  -23
  -25
  -26
  -28
  -30
  -31
  -33
  -35
  -37
  -40
  -42
  -44
  -47
  -49
  -52
  -55
  -58
  -61
  -64
  -67
  -71
  -75
  -78
  -83
  -87
New CAPEX, $m
  -23
  -21
  -22
  -23
  -24
  -25
  -26
  -27
  -28
  -29
  -31
  -32
  -33
  -35
  -36
  -38
  -39
  -41
  -43
  -45
  -47
  -49
  -51
  -54
  -56
  -59
  -62
  -65
  -68
  -71
  -75
Cash from investing activities, $m
  -33
  -37
  -39
  -42
  -44
  -46
  -49
  -52
  -54
  -57
  -61
  -63
  -66
  -70
  -73
  -78
  -81
  -85
  -90
  -94
  -99
  -104
  -109
  -115
  -120
  -126
  -133
  -140
  -146
  -154
  -162
Free cash flow, $m
  34
  50
  65
  81
  98
  115
  133
  152
  171
  192
  213
  227
  251
  275
  301
  328
  356
  386
  417
  450
  484
  520
  558
  598
  640
  684
  730
  779
  830
  884
  941
Issuance/(repayment) of debt, $m
  2
  33
  35
  36
  37
  39
  40
  42
  44
  46
  47
  49
  51
  54
  56
  58
  61
  64
  66
  69
  73
  76
  79
  83
  87
  91
  96
  100
  105
  110
  115
Issuance/(repurchase) of shares, $m
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash from financing (excl. dividends), $m  
  1
  33
  35
  36
  37
  39
  40
  42
  44
  46
  47
  49
  51
  54
  56
  58
  61
  64
  66
  69
  73
  76
  79
  83
  87
  91
  96
  100
  105
  110
  115
Total cash flow (excl. dividends), $m
  35
  83
  100
  117
  135
  154
  173
  194
  215
  237
  261
  277
  302
  329
  357
  386
  417
  450
  484
  519
  557
  596
  638
  681
  727
  775
  826
  879
  935
  994
  1,057
Retained Cash Flow (-), $m
  -61
  -30
  -30
  -32
  -33
  -34
  -36
  -37
  -38
  -40
  -42
  -43
  -45
  -47
  -49
  -51
  -54
  -56
  -58
  -61
  -64
  -67
  -70
  -73
  -77
  -80
  -84
  -88
  -92
  -97
  -101
Prev. year cash balance distribution, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash flow adjustment, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash available for distribution, $m
 
  54
  69
  85
  102
  120
  138
  157
  177
  197
  219
  233
  257
  282
  308
  335
  364
  394
  425
  458
  493
  529
  568
  608
  650
  695
  742
  791
  843
  898
  955
Discount rate, %
 
  6.10
  6.41
  6.73
  7.06
  7.41
  7.79
  8.17
  8.58
  9.01
  9.46
  9.94
  10.43
  10.95
  11.50
  12.08
  12.68
  13.32
  13.98
  14.68
  15.41
  16.19
  16.99
  17.84
  18.74
  19.67
  20.66
  21.69
  22.77
  23.91
  25.11
PV of cash for distribution, $m
 
  51
  61
  70
  78
  84
  88
  90
  91
  91
  89
  82
  78
  73
  67
  61
  54
  47
  40
  34
  28
  23
  18
  14
  11
  8
  6
  4
  3
  2
  1
Current shareholders' claim on cash, %
  100
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0

Morneau Shepell Inc. is a Canada-based company, which provides health and productivity, administrative and retirement solutions to assist employers in managing the financial security, health and productivity of their employees. The Company offers its services to organizations that are situated in Canada, the United States and internationally. The Company's services include consulting engagements, outsourcing engagements, employee and family assistance programs, and absence management solutions. The Company's administrative solutions practice is characterized by fixed contracts, which has 3 to 5 year terms. Its absence management solutions include attendance support and disability management. The Company's subsidiaries include Morneau Shepell Ltd., Morneau Shepell Limited, Morneau Shepell Asset & Risk Management Ltd., Morneau Shepell (Bahams) Ltd. and Morneau Shepell BDA Limited.

FINANCIAL RATIOS  of  Morneau Shepell Inc. (MSI)

Valuation Ratios
P/E Ratio 46.1
Price to Sales 2
Price to Book 3.3
Price to Tangible Book
Price to Cash Flow 17.9
Price to Free Cash Flow 27.3
Growth Rates
Sales Growth Rate 4.4%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate -11.5%
Cap. Spend. - 3 Yr. Gr. Rate 0.9%
Financial Strength
Quick Ratio 0
Current Ratio 0.2
LT Debt to Equity 68.2%
Total Debt to Equity 69.1%
Interest Coverage 0
Management Effectiveness
Return On Assets 3.4%
Ret/ On Assets - 3 Yr. Avg. 3%
Return On Total Capital 4.2%
Ret/ On T. Cap. - 3 Yr. Avg. 3.7%
Return On Equity 7.8%
Return On Equity - 3 Yr. Avg. 6.9%
Asset Turnover 0.8
Profitability Ratios
Gross Margin 0%
Gross Margin - 3 Yr. Avg. 0%
EBITDA Margin 12.3%
EBITDA Margin - 3 Yr. Avg. 11.9%
Operating Margin 9%
Oper. Margin - 3 Yr. Avg. 8.5%
Pre-Tax Margin 6.4%
Pre-Tax Margin - 3 Yr. Avg. 5.9%
Net Profit Margin 4.4%
Net Profit Margin - 3 Yr. Avg. 4%
Effective Tax Rate 31.6%
Eff/ Tax Rate - 3 Yr. Avg. 32.4%
Payout Ratio 153.8%

MSI stock valuation input parameters

Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the MSI stock intrinsic value calculation we used $592 million for the last fiscal year's total revenue generated by Morneau Shepell Inc.. The default revenue input number comes from 2016 income statement of Morneau Shepell Inc.. You may change it if you feel that it should be adjusted for some unusual circumstances that are not expected to be repeated in the future or if you already know (from interim financial statements, for example) that this year's revenue is going to be quite different.

Revenue growth rate. Forecasted future revenue growth rate is the most important input parameter for the intrinsic value calculation. Unlike other input parameters that are reasonably expected to be in line with their historic averages or their historic trends, the revenue growth rate by and large is a wild card: nobody really knows what the company's revenue will be in the future. Of course, the level of unpredictability is different for different industries (utility companies being the most predictable and, thus, less risky).
    We use three input parameters to forecast the revenue growth rate in our MSI stock valuation model: a) initial revenue growth rate of 8.1% whose default value is the revenue growth rate in the most recent quarter compared to the quarterly revenue a year ago; b) terminal revenue growth rate of 5% whose default value is chosen to be close to the average nominal (i.e. not adjusted for inflation) GDP growth rate; and c) revenue decline factor of 0.9, which stipulates that revenue growth rate in each forecasted year will be equal to the difference of the revenue growth rate in the preceding year and the terminal revenue growth rate multiplied by this revenue decline factor (with the passage of time the revenue growth rate will be approaching the terminal revenue growth rate, but not quite reaching it - though the difference could be infinitesimally small).
    At the revenue decline factor of 1, the future revenue growth rate is forecasted to be constant and equal to the initial revenue growth rate. The smaller the revenue decline factor, the faster the revenue growth rate will approach the terminal revenue growth.

Discount rate. The discount rate is used for determining the present value of future cash flows: future cash flows are "discounted" as at normal conditions (that translate into positive expected return on investment) one dollar today is worth more than the same dollar in the future. Unlike all other valuation models, we use variable discount rate, i.e. it increases for each consecutive year. This is done to account for higher risk of cash flows coming in further in the future.
    The initial discount rate of 6.1%, whose default value for MSI is calculated based on our internal credit rating of Morneau Shepell Inc., is applied to the cash flow expected to be received a year from now (well, actually, to be precise, in the financial year following the base year - the last year for which we have financial statements). For each consecutive year the discount rate is multiplied by the discount rate multiplier of 1.05, e.i. each year it increases by 5%. Feel free to change this number to correspond to your level of risk assessment of Morneau Shepell Inc..
    By the way, it is easy to set the discount rate to be constant (this would make comparison with other valuation models easier): just set the discount rate multiplier equal to 1 and chose the magnitude of the initial discount rate to your liking.

Variable cost ratio is the ratio of variable costs (i.e. costs that fluctuate with fluctuation of the volume of production) to the revenue expressed as a percentage. In the calculation of intrinsic value of MSI stock the variable cost ratio is equal to 43.9%.

Fixed operating expenses is just that - expenses that are not dependant on the volume of production. They are set to $286 million in the base year in the intrinsic value calculation for MSI stock. These expenses increase with the level of inflation in subsequent years.

Interest rate on debt is the average all-in rate of interest paid by the company on its debt. It is set at 3.5% for Morneau Shepell Inc..

Corporate tax rate of 27% is the nominal tax rate for Morneau Shepell Inc.. In reality, companies find ways to pay much less taxes than that or not to pay them at all.

Cash flow adjustment could be used for any adjustment the investor deems necessary. Most commonly we use this field to account for stock options-related effects in excess of what is reported on the company's income statement. The cash flow adjustment is expressed as a percentage of the revenue, and in the current valuation of the MSI stock is equal to 0%.

Production assets are the company's assets used for manufacturing products or provision of services. In the valuation model input table they are expressed as a percentage of revenue and for MSI are equal to 45%.

Life of production assets of 16.7 years is the average useful life of capital assets used in Morneau Shepell Inc. operations. It is used to calculate yearly capital expenditures needed to keep these assets in good order - we call it the maintenance CAPEX.

Working capital is the difference between the company's current assets and liabilities. In the model we use the ratio of working capital to revenue, which for MSI is equal to 11.3%. A negative number means that the company is apt at using financial resources of its suppliers and customers; a large positive number, on the other hand, means that it either provides in-kind financing to others or is not good at managing its inventories.

Book value of equity - $362 million for Morneau Shepell Inc. - is used in calculation of the "floor" for intrinsic valuation based on the discounted cash flow (DCF) method. Even if the prospects are very bad for a company, its assets could always be sold now for their current fair market value.

Shares outstanding of 53.818 million for Morneau Shepell Inc. is needed to calculate the intrinsic value of one share.

Market capitalization is used here only for reference purposes and as a quick check that the share price and the number of shares outstanding numbers are correct - something especially to be cognizant about at stock splits. So, the market capitalization of Morneau Shepell Inc. at the current share price and the inputted number of shares is $1.2 billion.

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Financial statements of MSI
Valuation of Stocks

The paper VALUATION OF STOCKS: The Quest for Intrinsic Value provides a detailed description of our valuation model and discloses the calculation algorithm.

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