CGI Group gets new $100.00 price target at Echelon

A potentially large new contract for CGI Group (TSX:GIB.A) has Echelon Wealth Partners analyst Ralph Garcea raising his price target on the stock.

The trade paper Washington Technology yesterday reported that officials at CGI Federal confirmed a report by Federal News Radio of a new contract with a “potential value” of $500-million that will see CGI Federal provide cybersecurity to five federal agencies under the government-wide Continuous Diagnostics and Mitigation Program.

Garcea talked about what this contract might look like.

“This order covers tools and services for departments of Commerce, Justice, Labor and State, plus the U.S. Agency for International Development,” the analyst notes. “These are Group C agencies under the larger US$3.4B CDM DEFEND umbrella program run by the Homeland Security Department. The order has a total term of up to almost seven years – one base year, five individual option years, and a final ten-month option period. We view this win as a key demonstration of CGI’s capabilities in the US Federal landscape. We note that historically US Federal revenue has been in the low teens as a percentage of total. Given the increased bookings, continued organic growth, improving margins and the robust macro tailwinds in IT Services spend.”

In a research update to clients today, Garcea maintained his “Buy” rating but raised his one-year price target on CGI from $90.00 to $100.00, implying a return of 15.6 per cent at the time of publication.

Garcea thinks CGI will generate EBITDA of $2.06-billion on revenue of $11.41-billion in fiscal 2018. He thinks those numbers will improve to EBITDA of $2.19-billion on a topline of $11.64-billion the following year.

Garcea says those looking for more evidence of upside in CGI should note its disciplined buy strategy.

“CGI has stayed true to its proven formula of buying the “right acquisition” at the “right price” at the “right time”. There are still many opportunities in the fragmented IT Services industry as CGI has identified 5,000+ companies in its M&A funnel, with combined revenue of US$200B+. CGI recently acquired Affecto Oyj for US$123M (valued at an EV/Sales of 0.9x and EV/EBITDA of 14.9x), Paragon, Summa and Facilite Informatique.
CGI will continue to do small tuck-in deals of local and IP-based services firms (Toronto-based JSL (Private), France-based Alcyane (Private), and Boston-based Collaborative Consulting (Private)), while patiently waiting for the next transformational deal (after AMS, Stanley, and Logica).”