4Front Capital’s Batrovic upgrades CGI Group to HOLD

Batrovic says his reasoning in downgrading CGI earlier this was that Logica’s lower margins, lack of revenue growth, and location in a troubled region was not being adequately discounted. Now that the market has taken care of that discount, Batrovic says he “not see any evidence of structural deficiencies in the acquisition.” CGI Group (TSX:GIB.A) yesterday reported its Q4, 2012 results.

The company generated fourth-quarter revenue of $1.04-billion, representing year-over-year growth of 3.6%. Including the six weeks of Logica results, whose consolidation was effective August 20th, fourth-quarter revenue was $1.6-billion.

CEO Michael Roach commented on the quarter and year. “I am pleased with our overall performance as we continue to focus on helping clients meet their business objectives,” he said. “We are well positioned operationally and financially to continue to execute our profitable growth strategy in F2013 and beyond.”

4Front Capital Partners analyst Dushan Batrovic, who issued a SELL on CGI Group after the Logica acquisition, says this was a “weak and messy” quarter.

Batrovic expected Logica’s six week contribution would add $30-million in EBITDA in Q4, but the actual number, according to his calculations, was just $19-million. Still, says the 4Front Capital analyst, shares of CGI have declined more than 12% since his downgrade note in September. Batrovic says he remains comfortable with his $23 target price, but the share price action has caused him to upgrade his rating to HOLD from SELL.

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CGI Group was founded in Montreal in 1976. The Company’s name is an acronym for Consultants to Government and Industry. Midway through 2010, CGI picked up Stanley, an Arlington, Virginia based systems integrator for a billion dollars. But the company was just getting started; on August 20th, CGI completed the largest acquisition in its history, picking up London-based Logica Plc, a company that was actually larger CGI, for $2.64-billion. CGI Group now ranks as the sixth largest independent information technology and business process services firm in the world.

Batrovic says his reasoning in downgrading CGI earlier this was that Logica’s lower margins, lack of revenue growth, and location in a troubled region was not being adequately discounted. Now that the market has taken care of that discount, Batrovic says he “not see any evidence of structural deficiencies in the acquisition.” Batrovic says his fiscal 2013 revenue estimate of $10.2-billion in revenue and EPS of $2.16 is in the ballpark of CGI Group management’s guided 25-30% accretion target for for fiscal 2013.

Shares of CGI Group on the TSX closed today down .2% to $22.92

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