Strong quarterly results from CGI, says National Bank

National Bank of Canada analyst Richard Tse believes CGI Group (CGI Group Stock Quote, Chart, News, Analysts TSX:GIB.A) continues to push the right buttons, maintaining a “Buy” rating and target price of $135/share for a projected return of 20.0 per cent in an update to clients on November 10.

Founded in 1976 and headquartered in Montreal, CGI Group provides information technology (IT) and business process services around the world, including the management of IT and business outsourcing, systems integration and consulting and software solutions selling activities.

Tse’s analysis came after CGI released its fiscal fourth quarter financial results, which Tse noted to be better than expected, and overall, the best the company has reported in the last eight quarters, though he did also note some questions from analysts regarding labour and wage inflation in an increasingly tight market.

“We know the labour market is tight, but we also know demand for services such as those offered by CGI are in high demand, which was corroborated by some of the strongest broad-based growth by geography and vertical we’ve seen in some time,” Tse said.

CGI Group’s financial results were headlined by $3.01 billion in revenue, a slight beat on the $2.97 billion projected by both the National Bank of Canada and the consensus. The company also produced quarterly beats with its EBITDA report ($493 million compared to the National Bank projection of $470 million and the consensus estimate of $475 million) and adjusted earnings per share ($1.40/share compared to the $1.35/share projected by both National Bank and the consensus.)

“The expansion in EBIT margin was due to improved utilization (revenue) and prior year non-recurring adjustments on client contracts, yet, we believe the Company has a number of levers at its disposal to preserve that margin potential,” Tse noted.

In his overall assessment of the results, Tse took a number of positives away from the report, namely that its bookings, despite being down 20 per cent sequentially and 16 per cent year-over-year, only appeared to be down on account of delayed conversions, and that book-to-bill remains healthy at a rate of 1.14x on a TTM basis, with bookings having been broad-based by geography and vertical with particular strength in U.S. Commercial and State / Federal Government, which accounted for 36 per cent of bookings in the quarter.

Tse also noted that the company’s digital intellectual property accounted for 21 per cent of the company’s revenue in the quarter, a 50 per cent year-over-year jump which came through recent acquisitions, which Tse said demonstrated CGI’s ability to leverage its global footprint to expand its reach.

“CGI ended fiscal 2021 in a strong position, with accelerating revenue growth and a robust book of business and balance sheet,” said George Schindler, President and Chief Executive Officer of CGI Group in the company’s November 10 press release. “Looking to the year ahead, we will accelerate our investments in the talent and capabilities necessary to expand our services and global footprint in support of clients’ evolving digital transformations.”

CGI’s updated financial results have caused Tse to revise some of his financial projections in both the short and long term, upping his revenue projection for the opening quarter of the 2022 fiscal year to $3.1 billion from the originally estimated $3.08 billion, and his overall projection for the 2022 fiscal year to $12.7 billion from $12.6 billion, marking a potential year-over-year increase of 4.7 per cent. Meanwhile, Tse maintains a $13.1 billion projection for 2023, a potential year-over-year increase of 3.4 per cent.

Tse also upped his estimations on EPS, projecting $1.44/share for the first quarter of 2022 over the previously projected $1.43/share, and a rise to $5.95/share for 2022 overall compared to the $5.93/share initially forecasted, while maintaining a $6.26/share projection for 2023.

Looking at EBITDA, Tse projects a jump to $2.6 billion in 2022 from the $2.47 billion reported in 2021, followed by a boost to a projected $2.71 billion in 2023.

From a valuation perspective, Tse expects the EV/Sales multiple to remain relatively steady at 2.3x in both 2022 and 2023, with the EV/EBITDA multiple dropping from the reported 12x in 2021 to a projected 11.4x in 2022 and a projected 10.9x in 2023.

“We believe CGI is moving back to its previous growth trajectory (both organic and inorganic) pre-COVID and FQ4 suggests that growth trajectory has the potential to be even stronger,” Tse said. “For longer-term investors, we believe IT Services remains one of the segments in tech to see outsized benefit from a “reopening”, particularly for vendors that can pivot their service offerings into areas of demand, much like CGI is doing.”

Overall, CGI Group’s stock price has produced a 9.4 per cent return over the course of the year, maintaining its momentum after bottoming out at $95/share on February 26, eventually reaching a high of $116.75/share on September 2.