A solid quarter from a company well-positioned to benefit from industry tailwinds. That’s the scoop on CGI Group (CGI Group Stock Quote, Chart, News, Analysts TSX:GIB.A) from National Bank of Canada analyst Richard Tse who maintained a “Buy” rating and target price of $135/share on CGI for a projected return of 20.3 per cent in an update to clients on Wednesday.
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 comes after CGI reported its first quarter financial results.
“While we believe the results were solid, most impressive was the company’s ability to expand margins (+50 bps Y/Y growth in EBIT Margin) under a tight labour market,” Tse said. “No doubt, that has been a concern across the IT Services sector given its relative reliance on labour – the ability to expand margins underscores CGI’s operating prowess.”
CGI’s financials were headlined by $3.09 billion in revenue in the quarter, marking a year-over-year increase of 2.4 per cent and staying in line with Tse’s estimates, as well as being in the ballpark of the consensus projection of $3.11 billion. The company experienced 6.8 per cent constant currency growth in the quarter, its largest in a span of nine quarters.
According to Tse, 22 per cent of the company’s revenue came from Digital IP, reinforcing CGI’s goal of getting to 30 per cent IP revenue by the 2025 fiscal year.
CGI was also helped by $3.6 billion in bookings to imply a book to bill multiple of 1.17x, with Tse attributing the increase to an acceleration on the part of enterprises moving to accelerate their digital transformation programs.
The company beat Tse’s expectations when it comes to EBITDA, as the reported $521.5 million came in ahead of Tse’s estimate of $507.5 million, along with the consensus projection of $508.1 million. Tse primarily attributed the beat to a more profitable revenue mix in the Western and Southern Europe, Central and Eastern Europe and U.S. Federal segments.
The adjusted EPS told a similar story, with CGI reporting at $1.50/share to beat Tse’s forecast of $1.44/share and the consensus estimate of $1.45/share.
“CGI is off to a strong start in fiscal 2022 with accelerating revenue growth, strong bookings, and double digit EPS accretion” said President and CEO George D. Schindler in the company’s February 2 press release. “With a net increase of 6,000 employees year-over-year, our plan remains to deliver revenue growth and double digit EPS accretion for the year.”
Tse continues to project growth for CGI over the next couple years, with his 2022 revenue estimate of $12.7 billion representing a potential year-over-year increase of 4.8 per cent. Meanwhile, for 2023, Tse projects the company to reach $13.2 billion in revenue for an implied year-over-year increase of 3.5 per cent.
Tse also expects the company’s EBITDA to continue growing, with his $2.6 billion projection for 2022 implying a margin of 20.5 per cent, compared to the reported 20.3 per cent margin from the $2.5 billion in EBITDA from 2021. Looking to 2023, Tse projects $2.71 billion in EBITDA for an implied margin of 20.6 per cent.
Meanwhile, Tse projects the company’s adjusted EPS to grow from the reported $5.41/share in 2021 to $6.37/share by 2023, which he previously projected at $6.26/share.
Looking at valuation, Tse expects gentle movement in the company’s EV/Sales multiple, forecasting a drop from 2.4x in 2021 to 2.3x in 2022 to a projected 2.2x in 2023. His EV/EBITDA projections follow a similar path, dropping from the reported 12x in 2021 to 11.4x in 2022, then falling again to 10.9x in 2023.
Meanwhile, Tse projects the company’s P/E multiple to drop from 20.7x in 2021 to 18.6x in 2022, then to 10.9x in 2023.
“We believe CGI is moving back to its previous growth trajectory (both organic and inorganic) pre-COVID and FQ1 suggests that growth trajectory has the potential to be even stronger than pre-COVID,” 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.”
CGI has produced a return of 6.3 per cent over the last 12 months but is down 2.3 per cent since the start of 2022. About a year ago, on February 26, CGI was at a 52-week low of $95/share, but it has grown since then, peaking at a 52-week high of $116.75/share on September 2.
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