2023-03-24 03:56:11 ET
Summary
- Ceridian offers management and administration services for human resources activities through customizable software.
- In the last quarterly report, the company noted great confidence while entering 2023, with revenue growth close to 22%-24%, and an adjusted EBITDA of $92-95 million.
- I believe that recurring revenue will likely help the company if there is a recession in the coming months.
- I also believe that new product introductions and functionalities like Dayforce Wallet, further international expansion, and correct integration of existing acquisitions could make the stock trend higher.
Ceridian HCM Holding Inc. ( CDAY ) reported beneficial guidance for 2023 including significant recurrent revenue, and noted great confidence. I believe that new products and functionalities like Dayforce Wallet, new markets in new regions, and new large clients will likely drive FCF growth north. There are several risks from failed M&A, the debt level, and failed new product offerings, however the stock, in my view, remains undervalued.
Ceridian: Beneficial Guidance For 2023 And A Significant Amount Of Recurrent Revenue
Ceridian offers management and administration services for human resources activities through customizable software according to the needs of its clients. Dayforce is the name of the platform through which the company offers employee payment management, benefits, workforce management, and new talent search.
Ceridian reported beneficial guidance for 2023. It is a great reason to have a quick look at the company today. In the last quarterly report, the company noted great confidence while entering 2023, revenue growth close to 22%-24%, and an Adjusted EBITDA of $92-$95 million.
Our fourth quarter results exceeded our guidance across all metrics. We ended the year with strong Dayforce recurring revenue momentum, operating profit expansion, and significantly increased cashflow generation. This gives us great confidence entering 2023 and sets us up to make meaningful progress towards our mid-term commitment of profitable growth. Source: Quarterly Press Release
The massive increase in recurring revenue reported in 2022 is worth noting for starters. In 2022, recurring revenue stood at $1.047 billion, 23% more than that in 2021. With total 2022 revenue of $1.246 billion, I believe that recurring revenue will likely help the company if there is a recession in the coming months.
The Company Reports A Significant Number Of Clients In Many Different Industries And Several Countries
Currently, Dayforce management system is contracted by 5,400 active clients, meaning more than five million daily users of the product. Ceridian sells this software to companies of various sizes. For the same year, small companies (having up to 1,000 employees) accounted for 10% of active hiring, large companies (having up to 6,000 employees) accounted for 49% of the total active hiring, while the remainder is in use by those companies that have above 6000 employees. In my view, lack of revenue concentration around a few clients will likely be appreciated by investors. I believe that future revenue growth will likely be less volatile than that of other peers.
In addition to Dayforce, Ceridian offers Powerpay, a similar-purpose cloud platform exclusively for the Canadian market, typically for small and medium-sized businesses, through direct sales channels as well as partners. Ceridian also continues to provide services to companies that contracted its North American Bureau Solutions program, which was discontinued in 2012, facilitating the transfer of data to its new platform.
Dayforce is ready to manage pay, accounts, conditions, and employee development for companies in any industry. It is a unique application that allows it to be developed for the benefit of users, and provides a control architecture over the workforce and human resources of a company with real calculation tables and different functionalities that enrich the customer experience.
Recently, the company has added the Dayforce Wallet function, which is a payment system integrated into the operating platform, and serves so that employees have direct access to their earnings and the status of their accounts within the software through a function on demand. It was incorporated in 2020 in the United States and in 2021 in Canada, with 950 customers currently incorporated into the product. In my view, given the success of new functionalities in Canada, if the company offers the product in new markets, revenue growth will likely trend north.
The Dayforce subscription is arranged through direct sales channels, and payments are monthly; per employee per month. First of all, subscriptions are proposed with fixed prices within the next 3 to 5 years, with the possibility of expanding commercial contracts. In 2021, 538 subscription contracts were added to its client portfolio, and to date, none of these represents more than 1% of the revenue of Ceridian.
Assets: The Number Of Acquisitions And Goodwill Are Quite Impressive
The balance sheet reported in December 2022 included cash and equivalents of $431 million along with restricted cash of $0.8 million. The trade and other receivables were around $180 million with prepaid expense of $98 million. Finally, total current assets stood at $4.894 billion.
The right of use lease assets was $24 million with a property, plant, and equipment of $74 million, goodwill close to $2.2 billion, and other intangible assets worth $291 million. Finally, total assets were equal to $7.9 billion. I did appreciate that the total amount of goodwill is large. It means that management has expertise in the acquisition of smaller peers. With this in mind , I took a look at the acquisitions executed recently.
I believe that the assessment of the acquisitions could offer information about the targets. The company acquired Ascender for $359 million including goodwill worth $242 million, other intangibles of $138 million, and $13 million in properties. According to the press release of the acquisition, Ceridian bought a group with a large amount of expertise and many partners.
Ascender has deep industry expertise across all verticals, including higher education and government, coupled with a strong partner ecosystem. Source: Ceridian completes Ascender acquisition
Ceridian HCM also acquired ADAM for a small amount to increase its network in Latin America. The acquisition was not very large, but it shows that management is ready to acquire other competitors in order to increase its international revenue growth.
This acquisition will accelerate Ceridian's global growth strategy by extending the Dayforce platform into Latin America, a highly appealing region for our multinational customers. Source: Ceridian Acquires ADAM HCM to Extend Global Leadership
Liabilities: Long Term Debt May Stop Certain Investors From Buying Shares
The list of liabilities included a current portion of long term debt of $7 million in addition to a current portion of long term lease liabilities of $10 million. The accounts payable stood at $54 million with deferred revenue of $41 million and employee compensation and benefits worth $97 million. Total current liabilities were equal to $4.2 billion along with customer funds obligations worth $4.5 billion.
With long-term debt of $1.213 billion, employee benefit plans of $17 million, and long-term lease liabilities of $23 million, total liabilities were equal to $5.8 billion. The asset/liability ratio is close to 1x, however I would understand investors who may not feel comfortable with the total amount of debt reported. In my view, if the acquisitions turn out to be successful, the level of debt may decline over time, which may lead to higher EV/EBITDA multiples and better stock valuations.
Beneficial Expectations From Financial Analysts
I believe that the expectations of other financial analysts are quite beneficial. They expect net sales close to $2016 million with net sales growth of 16%, EBITDA of $615 million, and an EBITDA margin of 30%. Besides, 2025 EBIT would stand at $423 million with an operating margin of 21%, 2026 net income of $213 million, and 2024 free cash flow of $293 million. My numbers are a bit more conservative than those reported by investors, but I believe that readers may want to have a look at other opinions.
My Assumptions Include Expansion Into New Markets, Further Internationalization, And More Products And Services
The assumptions in my financial model include successful expansion of the platform into markets that the company has not yet been able to penetrate. For this, innovation and improvement of user experience will likely be critical. Moreover, I assumed that management will successfully offer new services and options on the platform.
I also assumed expansion of the client portfolio in the area of ??corporations, which are the companies with more than six thousand employees, and of course the clients that would pay the highest subscription fees for the use of the platform. Considering the type of clients that already work with Ceridian, I believe that convincing new corporations will likely not be difficult.
Finally, I believe that international expansion of the platform, serving local clients in new geographies, and extending its reach to multinational positioning companies will likely drive sales growth. With know-how accumulated in the United States, I believe that new markets will welcome the software of Ceridian.
My DCF Model
My numbers include 2030 net income of $125 million, deferred income tax benefit of -$64 million, and depreciation and amortization of $129 million. Additionally, I assumed 2030 net pension cost of $15 million and provision for doubtful accounts close to $15 million.
Besides, with 2030 share based compensation close to $189 million, a gain on sale of assets of -$32 million, and trade and other receivables of -$58 million, I estimated prepaid expenses and other current assets close to -$20 million. Finally, with accounts payable and other accrued expenses of $15 million, I foresee changes in deferred revenue of $9 million and 2030 CFO of $332 million. Additionally, with 2030 capex of -$22 million, 2030 FCF would be close to $311 million. I believe that my numbers are conservative, but I let readers have a look at them, so that they can form their own opinion.
My CAPM model included a beta of 1.64-1.83 with a cost equity around 14%, a tax rate of 17%, and cost debt of 7.30%, which implied a WACC of 10%. I obtained a residual value of $32 billion. My results also included an enterprise value of $15.75 billion, equity close to $14.95 billion, and a fair price close to $100 per share.
Competitors
Ceridian operates in a highly competitive market, and competes with both integrative service providers and small local and regional businesses. Internationally, the company competes with payment system franchises as well as online service providers for human resource management.
Some more modern companies offer similar services with applications built specifically to be used as a tool on the cloud platforms already owned by their clients. Here, we see a large number of variables and competition in different areas. Ceridian declares that it is in a position to compete in each area, and believes that its integrated platform service and on-demand resources are a differential, for which it is recognized, for its customers.
Risks
Ceridian does not seem to have major risks in its operations, beyond possible disruptions in its services or complications with the use of the platform. Although it does have a certain dependence on third parties for the design and licenses of its product. At present, we believe that Ceridian's greatest risk lies in the success or failure of its aggressive short-term growth strategy, aimed at scaling the business internationally.
Considering the total amount of goodwill and recent acquisitions, failed M&A is a clear possibility. Goodwill impairments may lead to decreasing book value per share, which may diminish future stock price increases.
The company also reports a significant amount of sales growth expectations. If sales growth does not grow as expected, many analysts will likely lower future FCF expectations, which may lead to lower stock valuations. I know that the results in the last quarter exceeded expectations. In my view, investors cannot expect the same to happen all the time.
Finally, the total amount of long term debt is not small. Debt holders may decide to block new acquisitions, or stop aggressive organic growth initiatives. As a result, analysts may also lower their expectations for the future, which may affect the stock demand.
Conclusion
Ceridian exceeded expectations in the last quarter, and reported once again beneficial guidance for 2023, including a significant increase in recurrent revenue. I also believe that new product introductions and functionalities like Dayforce Wallet, further international expansion, and correct integration of existing acquisitions could make the stock trend higher. I did identify a significant number of risks coming from competitors, the debt level, and dependence on third parties. With that, I believe that the stock is clearly undervalued.
For further details see:
Ceridian: Recurrent Revenue And Internationalization Make It Inexpensive