CGI is a buy, says National Bank

National Bank Financial analyst Richard Tse is staying bullish on CGI (CGI Group Stock Quote, Chart, News TSX:GIB.A) after recently hosting a lunch with the company’s management.

In an update to clients on Monday, Tse says that not only is the growth runway still available for CGI, the stock has defensive attributes, as well.

Montreal-headquartered CGI, a global IT consulting and systems integration company, has seen its share price grow steadily over the years, with 2019 being no exception. GIB.A is now up more than 30 per cent year-to-date and has experienced a nice pickup in the pace since its latest earnings report earlier this month.

There, CGI reported fourth quarter revenue of $2.96 billion, up 5.7 per cent from $2.80 billion a year earlier, and a profit of $324.1 million or $1.19 per diluted share, itself an improvement on last year’s $293.5 million or $1.03 per diluted share. Adjusted EBIT was $457.5 million or 15.5 per cent of revenue.

“I’m pleased with the growth in Q4, driven by IP and our managed IT services offering,” said George D. Schindler, President and CEO, in a press release. “The full year results reflect our ongoing ability to deliver organic growth and expanding margins.”

With his update, Tse is maintaining his “Outperform” rating and price target of $120.00, which represents an estimated total return of 11 per cent at the time of publication.

The analyst had a number of takeaways from the lunch, starting with management’s claim that operating margin expansion, a characteristic of CGI’s growth in the past, is not over yet, with the company now beginning to convert former System Integration and Consulting engagements into longer-term Managed Service and IP deals which benefit from scale.

At the same time, Tse noted that while IP has been a prominent growth driver for the company over the years along with Managed Services, the analyst notes that CGI has made overall growth gains despite the paring of legacy outsourcing revenue, which accounts for less than 14 per cent of the company’s revenue today.

Finally, while acquisitions have clearly been a focus for CGI over the years, management related that the market backdrop has softened and thus valuations are improving, meaning that a pickup in M&A activity is likely.

“Overall, what we heard from the lunch was consistent with our view on the stock where we see a runway for growth (organic and inorganic) that’s not fully priced into GIB.A. In addition, we continue to like GIB.A for its defensive attributes (recurring revenue and cash flow),” writes Tse.

“The only caveat from our lunch and consistent with the Company’s results commentary is that the Company does see a slowdown in the decision-making process given the macro backdrop. That’s no different from what we’ve heard from other large competitors. For CGI, while that may mean organic growth won’t accelerate, its pipeline will as digital transformation projects are increasingly evaluated as a way to drive cost savings,” he writes.

Tse thinks that CGI will generate fiscal 2020 revenue and EBITDA of $12.8 billion and $2.4 billion, respectively, and fiscal 2021 revenue and EBITDA of $13.2 billion and $2.5 billion, respectively.