Q1 Preview: CGI’s “contrarian” acquisition of Logica will pace growth, says Cormark

The integration of CGI Group’s (TSX:GIB.A) “contrarian” acquisition of Logica is ahead of schedule and will help pace the company to a higher share price, says Cormark analyst Richard Tse.

In a research update to clients this morning, Tse looked ahead to CGI’s Q1 results, which are due before market open on April 30th. The Cormark analyst says he expects a good quarter from CGI. He thinks the Montreal-based IT company will earn $0.72 a share on revenue of $2.7-billion, ahead of the street’s expectation of $0.69 per shares on a $2.6-billion topline.

Tse, who notes that CGI is currently trading more than 20% below a “broad comparable group of IT Services names”, says the acquisition of Logica, which was completed in August of 2012, was contrarian because of its exposure to Europe, which seemed dicey at the time. While Europe now represents more than 55% of CGI ‘s current revenue, he points to new data that suggests a broad based recovery is already underway in the European IT sector, and says CGI is still undervalued because investors are trading on old information.

The analyst says another reason CGI may be trading below its peers is that certain restructuring charges have come after the initial charges around the Logica pickup, hindering its numbers. He believes these charges should tail off over the next twelve months. He thinks the result of this will be a cash flow run-rate of about $300-million per quarter, which he says should produce free cash flow in excess of a billion dollars by fiscal 2015.

Tse today maintained his “Buy” rating and $45.00 one-year target on CGI Group.

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