CGI Group is still undervalued, National Bank says

Following the company’s third quarter results, National Bank Financial analyst Richard Tse is maintaining his “Outperform” rating on CGI Group (CGI Group News, Stock Quote, Chart TSX:GIB.A).

This morning, CGI reported its Q3, 2019 results. The company earned $309.4-million on revenue of $3.12-billion, a topline that was 6.1 per cent over the same period last year.

“I am pleased with this quarter’s results of continued revenue growth and profitability expansion as we execute our build-and-buy strategy in every operating segment,” CEO George D. Schindler said. “We continue to see strong client demand for our end-to-end services worldwide.”

Tse says this quarter was basically in-line with his expectations, with a few issues bubbling under the surface that he addressed.

“If there was any knock on the quarter, it would be the Company’s book-to-bill ratio which came in at 94.6% (or 0.946),” the analyst wrote. “Looking back, it’s been eight quarters (FQ3/17) since CGI’s book-to-bill has come in below 1x. Given that’s a leading indicator of revenue, it’s obviously a metric to reflect on. But is it something we need to worry about? In our view, not at this point. Why? As we see it, CGI has been running the court building its pipeline in recent years with digital transformation deals. That pipeline of active deals has also been made up of larger engagements and when combined with a consolidation of vendors, it’s creating extended sales cycles. While not ideal – it’s also not unusual particularly as digital transformation engagements are “new” to many of CGI’s prospective and existing customers. Given that, it’s not unreasonable to think the timeline has extended somewhat as those prospects require more diligence (time) when it comes to understanding those services. The upside is that those offerings also come with potentially more operating leverage and its our view that we’ll see an acceleration in their conversion over the next year. Bottom line, there was nothing from the results or the conference call that would have us materially changing our estimates, nor our investment thesis.”

CGI Group Undervalued, analyst says

In a research update to clients today, Tse maintained his “Outperform” rating and one-year price target of (C) $120.00 on CGI Group, implying a return of 17 per cent at the time of publication.

The analyst thinks CGI will post EBITDA of $2.23-billion on revenue of $12.1-billion in fiscal 2019. He expects those numbers will improve to EBITDA of $2.38-billion on a topline of $12.8-billion the following year.

“We continue to like GIB.a for its defensive attributes (recurring revenue / cash flow) and growth optionality (acquisitions, organic growth and margin expansion),” Tse adds.