CGI Group gets bullish new price target at National Bank

In a review of CGI’s third quarter, Tse reaffirmed his “Outperform” rating for the stock and upped his target price from $100.00 to $115.00, which at press time represented a projected 12-month return of 27.6 per cent.

Montreal-based CGI is Canada’s largest technology company with a worldwide employee base of 70,000. The company delivers IT consulting and systems integration services both onsite and remotely through CGI’s global delivery centres in North America, Europe and India.

CGI reported its fiscal third quarter 2020 on Wednesday, showing revenue down 2.2 per cent year-over-year to $3.05 billion and adjusted EBIT down 5.5 per cent year-over-year to $448.0 million, representing a margin of 14.7 per cent, down from 15.2 per cent a year earlier.

The company’s backlog at the end of the quarter stood at $22.30 billion and cash from operations for the quarter was $584.8 million, up from $375.2 million a year ago.

President and CEO George Schindler said the results were a testament to the strength of CGI’s strategy and leadership team.

“Our strong cash generation in the quarter was driven by the quality of our client relationships and delivery excellence. Looking ahead, we believe market and business conditions for our end-to-end services will gradually improve throughout the rest of this year, and we see expanding opportunities for profitable growth through both build and buy,” Schindler said in a press release.

The Q3 top and bottom lines were beats of both Tse’s and the Street’s estimates, where Tse was calling for revenue and adjusted EBIT of $2.84 billion and $428 million, respectively, and the consensus was $2.98 billion and $435 million, respectively.

On the quarter, Tse pointed to softer bookings (down 3.8 per cent) were no surprise, with a positive nuances coming from margins holding up well and a healthy-looking mix revenue mix, where CGI’s Managed IT and Business Process Services segment, which has longer-term recurring revenue, remained strong and accounted for 45 per cent of bookings, up three per cent year-over-year.

“Short term, while we still see some uncertainties regarding the impact from COVID and the pace of the re- openings of economies, FQ3 underscores the relative resilience in CGI’s business model. For longer-term investors, we believe IT Services will be one of the segments in tech to bounce back faster and in particular for companies that can redirect their service offerings into areas of demand,” Tse wrote.

“While those results are positive, we would note the business is still challenged in light of the 0.93x book-to-bill and the obvious uncertainties looking out short term. That said, on a relative basis, the results are holding up with the comparable group and it’s our view that the stock has been overly penalized relative to that same group. Pair that with our view that CGI should be a meaningful beneficiary on the other side of this health crisis with a pickup in digital transformation programs = we’re buyers,” Tse said.