A decade-long outperformance may have masked potential headwinds at CGI Group (TSX:GIB.A, NYSE:GIB), but National Bank Financial analyst Richard Tse says the company is in the midst of a quiet transition that will keep it at the cutting edge.
In a research update to clients today, Tse maintained his “Buy” rating and one-year price target of (C) $80.00 on CGI Group, implying a return of 22 per cent at the time of publication.
Tse says acquisitions have driven CGI’s share price for a decade, and the lack of a notable pickup has been missed of late.
“Despite years of meaningful outperformance, GIB.a / GIB has only slightly outperformed the broader Canadian market this year – rising 2.1% versus the S&P / TSX which is up 1.2%. In our view, what’s held GIB.a / GIB back is the absence of a meaningful acquisition for a name that’s built much of its value executing a strategy of acquiring IT services companies similar to or pliable into CGI’s operating model,” says the analyst. “And it’s worked out well – over the past 10 years, that strategy has driven a five-fold increase in the stock price.”
Tse, however, says it is time for a change at CGI, and he sees it coming in the form of acquisitions that are focused on IP and digital.
“Times have changed,” he says. “When we first began following the name many, many years ago, a big part of CGI’s business was in basic outsourcing functions like desktop support; that eventually evolved into higher value / consulting and outsourcing engagements from software (as a managed service) to applications development. And while those latter solutions continue to drive over ~60% of CGI’s revenue, there’s another transition afoot – IP and Digital, the latter being enterprises looking for partners that can help them transform / update / automate legacy processes.”
The analyst likens what he thinks might happen to CGI to what has already taken place at global management consulting firm Accenture.
“The reality is that this transformation takes more time than acquiring look-a-like companies and cutting costs as a way of building value,” he says. “The upside, however, is equally compelling as we look to what’s happened with Accenture and how its transformation towards IP / Digital has driven the bulk of its value growth (in our opinion). Like Accenture, we see CGI also being a beneficiary from such transformation which we believe is quietly underway, even if it’s not entirely evident on the surface.”
Tse thinks CGI Group will generate Adjusted EBITDA of $1.98-billion on revenue of $10.8-billion in fiscal 2017. He expects these numbers will improve to EBITDA of $2.1-billion on a topline of $11.3-billion the following year.
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