The valuation gap between CGI Group (TSX:GIB.A) and its more expensively priced peers will begin to tighten because the value creation from its “contrarian” acquisition of Logica will ultimately outpace expectations, says Cormark analyst Richard Tse.
Next Wednesday, before market open, CGI will report its Q3, 2014 results. The company is coming off a Q2 in which it posted earnings of $229.6 million on revenue of $2.7-billion, up 7% from last year’s second quarter topline.
Tse says that at 1.2x EV/Sales, 10.6x P/E, and 7.2x EV/EBITDA, based on his fiscal 2015 estimates, CGI remains undervalued. He believes the Logica integration will continue to reveal synergies against a backdrop of improvement in the European macro picture. “The stock’s valuation on C2015 EPS is 25% below a broad comparable group of IT Services names that include European and government/defense-focused companies,” he says.
For the upcoming third quarter, Tse thinks CGI will generate operating EPS of $0.74 per share on revenue of $2.8-billion, essentially in-line with consensus expectations. The Cormark analyst believes an accelerated debt-repayment schedule could soon put CGI in position to pursue another “sizable” acquisition.
In a research update to clients this morning, Tse reiterated his “Buy” recommendation and $45.00 one-year target on the stock.