CGI Group is undervalued, National Bank Financial says

Fourth quarter earnings from Montreal-based CGI Group (TSX:GIB.A, NYSE:GIB) came in slightly above expectations, with the company now positioned for solid growth going forward, says Richard Tse of National Bank Financial.

IT consulting and systems integration company CGI reported its Q4 on Wednesday, featuring revenue of $2.8 billion, representing 7.3 per cent year-over-year growth and coming in line with consensus expectations, also at $2.8 billion. CGI’s Adjusted EBIT margin of 15.6 per cent was a shade better than Tse’s estimate of 15.5 per cent and also an improvement over last year’s Q4 of 15.2 per cent.

In its press release, management emphasized the company’s rising backlog which now stands at $22.6 billion, up $1.8 billion year-over-year.

”The fourth quarter results demonstrate our ongoing ability to create value for all three stakeholders through the disciplined implementation of our build and buy strategy," said George D. Schindler, President and CEO, in a statement . "Building on this momentum and as we look ahead to fiscal 2019, we are well positioned – strategically, operationally, and financially – to deliver EPS expansion, and remain an active consolidator in markets around the world."

Tse says that for an indication of CGI’s strong growth prospects, one should look at the company’s bookings, which for the quarter came in at $3.5 billion, up from $2.9 billion the previous year. At the same time, he sees the company’s margins trending higher, as evidenced by the above-mentioned rise in Adj. EBIT margin. Tse notes that although the pool of candidates for significant acquisitions has tightened over the past year and a half, CGI nonetheless has upwards of $8 billion in capacity to pursue its acquisition strategy.

“Bottom line, our thesis on GIB.a/GIB is unchanged,” says Tse in an update to clients on Wednesday. “We believe CGI is moving up the value chain with an increasing proportion of revenue from IP and digital (higher margin), organically built and acquired. We like CGI's defensive (recurring cash flow and de-leveraging) attributes and the obvious optionality from M&A, particularly given a consistent record of execution.”

The analyst thinks CGI will generate revenue and EBITDA in 2019 of $11.93 billion and $2.24 billion, respectively, and revenue and EBITDA in 2020 of $12.38 billion and $2.39 billion, respectively.

Tse leaves his “Outperform” rating unchanged with the reiterated target price of C$100.00, representing a total return of 22 per cent at the time of publication.