Increasing cash flow strength and the likelihood of a “material” M&A transaction around the corner has Clarus Securities analyst Eyal Ofir feeling good about CGI Group (TSX:GIB.A).
Last Thursday, CGI Group reported its fourth quarter and fiscal 2014 results. For the quarter, the company posted adjusted EBITDA of $486-million on revenue of $2.48-billion, a topline that was up 1% over the same period last year.
“I am very pleased with the strong performance delivered in the fourth quarter and throughout fiscal 2014,” said CEO Michael Roach. “After two years and an investment of $575-million, the Logica integration program is complete, yielding annual cost synergies in excess of $400-million. Since closing the acquisition, CGI earnings per share have grown by more than 85 per cent. We remain focused on achieving further accretion by realizing incremental cost and revenue synergies. In summary, we begin fiscal 2015 in an excellent position strategically, operationally and financially.”
Ofir notes that CGI’s topline and adjusted EBIT was below his estimate and the street consensus. But he points out that the company’s consolidated adjusted EBIT margins improved to 14.9%, ahead of his estimate and the street consensus of 13%.
“Considering that our expectation of another weak bookings quarter has played out and we are able to lower our top line estimates while maintaining our earnings forecasts intact, speaks volumes to management’s ability to continuously improve efficiencies,” said Ofir.
In a research update to clients following the results, Ofir upgraded CGI Group to “Buy” from his previous “Hold” rating and raised his one-year target on the stock from (C)$42.00 to $46.00. He explains that his new target is based on a 2015 adjusted EPS multiple of 14.5x, which is “slightly ahead” of the peer average, a premium he thinks is warranted by the company’s improving operating efficiencies and ability to generate cash.