Company Overview: Maximus, Inc. (NYSE: MMS) specializes in business process services (BPS) for the health and human service industries. Its operating segments are 1) US Services Segment, which offers a variety of BPS, such as program administration, appeals and assessments, and related consultancy work to US state and local government programs, 2) US Federal Services Segment, which provides BPS solutions for a wide range of US federal civilian activities, including system and software development and maintenance and 3) Outside the US Segment, includes health and disability assessments, programme administration for employment assistance, and other job seeker-related services to governments and commercial customers in countries other than the US.

MMS Details

Key Takeaways from FY21 (ended September 30, 2021)

• Double-Digit Growth in Revenue: In FY21, the company's total revenue amounted to USD 4.25 billion, representing a 22.91% increase year-over-year from USD 3.46 billion in FY20.
• Surge in Operating Income: The company's operating income increased 41.71% YoY to USD 408.53 million in FY21 from USD 288.28 million in FY20, representing an improved operating margin of 9.6% in FY21 vs. 8.3% in FY20, attributable to a 127-bps reduction in total operating expense ratio.
• Growth in Net Income: In FY21, MMS reported a net profit of USD 291.20 million, increased from 214.51 million in FY20, representing a YoY growth of 37.75% with a diluted EPS of USD 4.67.

Revenues & Operating Profit Key Highlights; Analysis by Kalkine Group

Recent Developments

• On January 11, 2022, the company declared a quarterly dividend of USD 0.28 per common share, payable on February 28, 2022, to shareholders of record on February 15, 2022.
• On November 11, 2021, MMS stated that it had received the highest possible ranking of 2022 Military Friendly Employer Gold and the Military Friendly Supplier Diversity accreditation. MMS has received the Gold designation for the first time and the Military Friendly certification for the second time.
• On October 26, 2021, MMS stated that the Securities and Exchange Commission (SEC) had granted a USD 323 million contract. MMS will expand its existing Enterprise EDGAR (Electronic Data Gathering, Analysis, and Retrieval) system support services to include the whole EDGAR system under the 10-year contract. The SEC OneIT IDIQ was used to award the contract.
• On October 20, 2021, MMS announced that the contract novation to transfer loan servicing for US Department of Education-owned student loan accounts from Navient to Maximus acquired all necessary approvals from the US Department of Education (DoE). Maximus has taken over as the loan servicing contractor for 5.6 million Department of Education-owned student loan accounts, replacing Navient.

Segment Wise Results FY21

• US Services Segment – This segment accounted for 07% of the total revenue in FY21, reported YoY growth of 25.04% to USD 1.66 billion, driven by COVID-19 response work.
• US Federal Services Segment – This segment accounted for 50% of the total revenue in FY21 and expanded by 15.92% YoY to USD 1.89 billion due to the US Census Contract.
• Outside the US Segment – This segment accounted for 43% of the total revenue in FY21, increased by 40.12% YoY to USD 699.09 million, attributable to employment services contracts.

Balance Sheet & Liquidity Position

• Increased Cash Balance: The company exited FY21 with total cash and cash equivalents of USD 135.06 million, significantly higher than USD 71.74 million at the end of FY20.
• Cashflow from Operations: Operating cash inflow in FY21 increased to USD 517.32 million from USD 244.59 million in the prior corresponding period.
• Raise in Leverage: MMS reported total outstanding debt of USD 1.51 billion as of September 30, 2021, higher than USD 28.90 million as of FY20 end.

Key Metrics: In FY21, MMS's operating and net margins were 9.6% and 6.8%, higher than the previous annual of 8.3% and 6.2%, respectively. ROE stood at 21.4%, 1,560 bps more than the industry median. Debt/Equity was 1.02x as of September 30, 2021, significantly higher than 0.02x on September 30, 2020.

Profitability and Leverage Profile; Analysis by Kalkine Group

Top 10 Shareholders: The top 10 shareholders together form around 50.23% of the total shareholding, while the top 4 constitute the maximum holding. The Vanguard Group, Inc., and BlackRock Institutional Trust Company, N.A. hold the maximum stake in the company at 11.16% and 10.21%, respectively, as also highlighted in the chart below: 

Top 10 Shareholders; Analysis by Kalkine Group 

Risk Analysis

• Dependence on Government Contracts: In FY21, Contracts with state and local government agencies accounted for ~39% of MMS' total revenue, with the State of New York accounting for ~9% of the total revenue. The US Federal Government accounted for approximately 42% of the company's topline. Any significant deterioration in its relationship with governments and a corresponding reduction in these contracts would significantly reduce the revenue and harm the business.
• Competition Risk: MMS operates in the information technology industry and faces direct competition from more significant players having higher financial and operational resources at their disposal. Also, in some geographies, smaller enterprises with established reputations and political ties pose challenges for the company. All of these factors could undermine the MMS' business prospects.
• Dependence on Third-Parties: MMS regularly deploys subcontractors, teaming partners, or third parties to deliver a single-source solution to its customers. Any failure on the contractual obligation by these third parties could lead to termination of the contract, thus impacting the overall operations.

Outlook

• Looking forward, MMS expects its FY22 revenue to range between USD 4.40 – 4.60 billion, along with diluted EPS of USD 4.00 – 4.30 (including ~USD 90 million of Intangible Amortization).
• It also anticipated generating Cash flow from operations and free cash flows to the tune of USD 275 – 325 million and USD 225 – 275 million, respectively.
• The outlook for the FY22 includes assumptions about when and how core programs, particularly those in the US Services Segment, will recover to pre-pandemic levels.
  

Valuation Methodology: EV/Sales Based Relative Valuation (Illustrative)

Source: Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company's FY1 trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks. 

Stock Recommendation: MMS's share price has corrected 18.70% over the past nine months. The stock is currently leaning towards the lower band of its 52-week range of USD 74.38 to USD 96.05. We have valued the stock using the EV/Sales multiple-based illustrative relative valuation method and arrived at a target price with an upside of high teens (in percentage terms). We believe that the company can trade at a premium compared to its peer's average, considering its strong cash flows, robust profitability margins and recent commercial contracts. We have taken peers like Concentrix Corporation (NASDAQ: CNXC) and International Money Express Inc. (NASDAQ: IMXI). Considering the strong top-line performance, robust profitability margins, growth across segments, associated risks, and current valuation, we give a "Buy" recommendation on the stock at the closing price of USD 77.15, up 0.55% as of January 14, 2022.

MMS Technical Chart, Data Source: REFINITIV 

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decision should be made depending on the investors' appetite for upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the valuation has been achieved and subject to the factors discussed above.

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Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.