CGI Group wins price target raise at National Bank following Q1 results

The stock may have suffered under COVID but the outlook for CGI Group (CGI Group Stock Quote, Chart, News, Analysts TSX:GIB.A) is positive according to National Bank Financial analyst Richard Tse, who reviewed the company’s latest quarterly results in an update to clients on Wednesday.

Montreal-headquartered CGI is Canada’s largest tech company with about 70,000 employees and annual revenues of $12 billion. CGI provides IT consulting and systems integration services globally, and while business was hit by the pandemic, the company looks to bounce back this year as its customers resume their IT spends.

“CGI started fiscal 2021 with strong results as our operational discipline and quality client delivery contributed to earnings growth,” said President and CEO George D. Schindler in a January 27 press release on the company’s fiscal Q1 for the period ended December 31.

“Our business pipeline continues to improve, with bookings up 24 per cent year-over-year as clients are increasingly turning to technology, and CGI, to assist them as they navigate the continuing pandemic and prepare for a post-pandemic environment. Our ability to offer relevant, timely and actionable insights to our clients combined with our strong cash generation will continue to drive profitable growth,” Schindler wrote.

CGI reported Q1 revenue of $3.02 billion, down 1.2 per cent year-over-year, and adjusted EBIT of $496 million, up 16.4 per cent year-over-year. Cash flow from operations was $598 million versus $465 million a year ago and $492 million for the previous quarter, while bookings hit $3.4 billion compared to $2.8 billion a year earlier. At the end of the fiscal first, CGI’s backlog stood at $22.8 billion versus $22.3 billion a year earlier.

On the potential for upcoming M&A activity, management said in the press release, “With cash of $1.68 billion on hand at the end of December 2020 and its revolving credit facility, the Company has $3.19 billion in readily available liquidity to pursue its Build and Buy profitable growth strategy.”

On the first quarter results, Tse said the $3.02 billion in revenue compared to his $3.07-billion estimate and the consensus $3.02 billion, while the adjusted EBIT of $496 million compared to Tse’s $464 million and the consensus $469 million. Adjusted EPS came in at $1.33 per share, which was above both Tse’s $1.21 per share and the Street’s $1.24 per share.

Tse characterized the FQ1 results as solid, saying it looks like CGI’s revenue has baselined from a COVID perspective and that there’ll be a return to growth over the second half of fiscal 2021.

“In the short-term, it appears that CGI and its customers have adjusted to a new norm and as such are moving ahead on initiatives regardless of some uncertainty around the continued health backdrop as evidenced by this quarter’s strong bookings which were ahead of the pre-COVID levels,” Tse wrote.

“Longer-term, we continue to believe the pandemic has underscored the value of digital transformation for many of CGI’s existing and prospective customers. In our view, that should drive an acceleration in pipeline, bookings and revenue looking ahead. All things being equal, we believe GIB.a is a compelling name with an attractive risk-to-reward combined with attractive relative valuation. We’re buyers,” he said.

Digging into the numbers, Tse said the lift in bookings was a good sign as it reflected an acceleration in ongoing digital transformation initiatives by customers. Tse pointed to System Integration and Consulting, which accounted for 50 per cent of total bookings, up from 43 per cent at the end of the last quarter, saying that an increase in those services would tend to drive longer-term recurring Outsourcing/Managed Services jobs.

On margins, Tse said CGI is flexing its operating discipline and showing structural benefits from previously announced restructuring plans as well as synergies from prior year acquisitions. Tse also noted the uptick in bookings coming from CGI’s IP/Digital segment (up 58 per cent year-over-year, which should ultimately drive incremental operating leverage.

Tse also noted the Q1 cash flow from operations at $598 million which was well above his estimate of $495 million, saying that the cash flow strength will help in accelerating the company’s metro market strategy.

“We believe CGI is moving back to its previous growth trajectory (both organic and inorganic) – the strong results seem to support that view as we look ahead. We continue to believe the IT Services sector will be one of the segments in tech to benefit meaningfully exiting the pandemic, particularly for vendors that can pivot their service offerings into areas of demand – much like CGI is doing,” Tse wrote.

With the update, Tse reasserted his “Outperform” rating for CGI and increased his target price from $115 to $120, which at press time represented a projected 12-month return of 21.1 per cent.