The recent negativity surrounding CGI Group’s (TSX:GIB.A) involvement with Healthcare.gov will ultimately be eclipsed by the continued progress of its contrarian acquisition of Logica, says Cormark analyst Richard Tse.
Shares of CGI fell this week after Jim Chanos of Kynikos Associates announced that he had made the stock one of his largest short positions.
Chanos said Healthcare.gov was a “PR mess” for CGI and could affect its ability to win future government work. He also says the Canadian company is up against decreasing free cash flow and declining bookings of new orders. In a ten-page memo to clients that was obtained by Newsweek, Chanos also said he suspected certain “accounting conventions”, such as recognizing revenue already counted by Logica, had improved CGI’s earnings.
Tse argues that there is a “lingering and recurring bear thesis” around CGI’s cash flow and profitability. He says representing the recent decline in cash flow as a normalized run rate is simply not reflective of the the company’s outlook going forward post the integration of Logica.
Regarding the concern of the reporting of acquisitions and the provisions for Logica, Tse says he believes CGI’s ability to take such provisions is reasonable and would clearly be subject to a financial review. Given an unqualified audit opinion, he assumes the numbers subscribe to GAAP.
The Cormark analyst says there is no doubt that the fallout from the Healthcare.gov fiasco is obviously not and ideal situation, but that drilling down on the affair reveals support for CGI’s contention that its role in the affair was inherently limited. In fact, says Tse, in some states where CGI managed the entire health exchange programs, there has been praise on execution.
Tse says that at a P/E of 12.4x and an EV/EBITDA of 7.9x his fiscal 2014 estimates, CGI Group is attractively valued. He believes this valuation does not reflect the true upside that will come from increased revenue synergies from the Logica acquisition. In a research update to clients this morning, Tse reiterated his Buy recommendation and $45.00 one-year target.
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