On Wednesday, KeyBanc reaffirmed its Overweight rating on Alight Solutions (NYSE:ALIT) with a steady price target of $12.00. The firm's analyst highlighted the company's recent move to sell its Professional Services segment and Payroll & Human Capital Management (HCM) Outsourcing businesses within the Employer Solutions segment to an affiliate of H.I.G. Capital. The deal, valued at up to $1.2 billion, is approximately 10 times the adjusted EBITDA for fiscal year 2023.
The transaction is expected to enable Alight Solutions to lower its net leverage ratio to below 3.0x by using the proceeds to pay off debt. Additionally, the company plans to utilize the funds for reinvestment opportunities and to enhance shareholder returns. Following the completion of the sale, Alight anticipates an increase in recurring revenue from 84% to over 90% and an improvement in adjusted EBITDA margins by roughly 300 basis points. The mid-term adjusted EBITDA margin guidance is projected to rise to 28%, up from the previous 25%.
In tandem with the divestiture, Alight's Board of Directors has approved an expansion of the company's share repurchase program by $200 million. This increase represents about 4% of the total outstanding shares at current market prices. The strategic decision to sell these segments comes after Alight announced a portfolio review in February. The sale's valuation, which is higher than Alight's current overall valuation multiple, suggests a significant undervaluation of Alight's core Employer Solutions platform, which offers higher margins.
The analyst from KeyBanc views the announcement as a positive development, indicating that investors had been looking forward to the divestiture of the lower-margin Professional Services business. The transaction assigns a valuation to the Professional Services and Payroll & HCM Outsourcing business that is higher than the current valuation multiple for Alight, signaling to investors the potential undervalued state of the company's higher-margin core services.
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