Canaccord Initiates Coverage Calling it an "under-the-radar, mid-cap compounder," Canaccord Genuity analyst Rufus Hone initiated coverage of People Corp. (PEO-X) with a "buy" rating.
"In our view, People Corp is a compelling growth story," said Mr. Hone on the Toronto-based employee benefit, pension and human resource consulting company
Mr. Hone thinks the Canadian small and medium size enterprise (SME) market's structure now sits fragmented and "ripe for consolidation," which is likely to benefit People.
"The Canadian SME market for group benefits, retirement and HR consulting has traditionally been serviced by many small/regional companies, providing a fairly narrow range of services," the analyst said. "Since 2006, People Corp has successfully completed 20+ acquisitions (financed through cash and stock) as they consolidate the market. With acquisitions typically done at 5-7-times EBITDA multiples and PEO shares trading at a mid-teens multiple, this is a highly accretive combination. Based on data from Statistics Canada, we estimate that People Corp has a market share only in the low to mid-single digits. People Corp has discussed a very strong pipeline of acquisitions (with 100s of potential targets) and an increasing number of inbound calls from business owners looking to sell.
"Part of our investment thesis is underpinned by what we view as an attractive industry backdrop, primarily driven by: (i) rising healthcare costs; (ii) aging demographics of the workforce; (iii) higher utilization rates; (iv) the advent of new medical services; (v) the increasing prevalence of chronic diseases; and (vi) the high cost of new drugs and treatments. While these trends remain a challenge for many employers and the healthcare industry, the business of providing employee benefits and HR solutions should be a beneficiary."
Mr. Hone said he expects to People to continue to grow at a more rapid pace than the current expectations on the Street, pointing to "healthy organic growth rates complemented by a modest amount of acquisition activity over the next several years."
"Our 2019E-21E EBITDA estimates are between 12-22 PER CENT above consensus as we model sustained organic growth and modest acquisition activity," he said. "For reference, over the last five years, People Corp has grown revenues by 300 per cent. This includes average organic growth of 10 Per cent annually."
Pointing to its "low risk, highly cash generative business model with an attractive, increasingly sticky revenue mix," Mr. Hone set a target price of $10 for its shares. The average is $9.43.