CGI is a Buy, says National Bank

Strong quarterly results were a good sign for fans of Canadian IT juggernaut CGI Inc (CGI Inc Stock Quote, Charts, News, Analysts, Financials TSX:GIB.A), according to National Bank Financial analyst Richard Tse who updated clients on the company on Wednesday. Tse maintained his “Outperform” rating on CGI as well as his $135.00 target, which at press time represented a projected one-year return of 30.9 per cent.

Canada’s largest tech company with IT consulting, systems integration and outsourcing solutions for customers worldwide, Montreal-headquartered CGI delivered its second quarter fiscal 2022 financials on Wednesday, showing revenue up 6.2 per cent year-over-year to $3.27 billion and adjusted EBIT up 7.7 per cent to $523.6 million. Diluted EPS was up 14.2 per cent to $1.53 per share, which cash from operating activities was $472.6 million or 14.5 per cent of revenue.

“In the second quarter of fiscal 2022, we delivered on our profitable growth plan with double digit increases year-over-year in both revenue and EPS,” said George D. Schindler, President and CEO, in a press release. “Across our end-to-end portfolio of services, demand remains strong as clients continue to turn to our talented teams to help them transform their digital value chains. This robust demand environment, and our recently announced mergers, will continue to create new shareholder value in the second half of the year and beyond.”

CGI’s bookings were down for the quarter to $3.316 billion compared to $3.892 a year earlier, while the company’s backlog inched upwards to $23.144 billion compared to $23.094 a year ago.

As for the company’s share price, GIB.A did a fine job climbing out of the pandemic-induced hole created in early 2020, rising to pre-COVID levels by mid-2021, but the stock crested and then started falling back last fall. Year-to-date, CGI is now down about six per cent.

Looking at the fiscal Q2 numbers, Tse said they beat his estimates and labelled them overall strong. The $3.27 billion in revenue was better than his forecast at $3.19 billion (the consensus call was the same), while adjusted EPS of $1.53 per share was also above his $1.51 per share estimate (consensus was also $1.51). 

Tse said CGI’s revenue growth was driven in part by acquisitions, although organic growth was up about five per cent year-over-year, and it was notable that the company was able to hold its margins despite the tight labour market impacting wages, improving in adjusted EBIT margin to 16.0 per cent, up 20 basis points.

“Overall, the biggest takeaway for us was that the results support continued and likely accelerating growth through a combination of acquisition and organic measures. On the acquisition side, based on our recent discussions with Management and a pullback in market valuations, we’re confident the Company is on the path to deploying ~$1 billion toward acquisitions this fiscal year. Notably, while we’d value organic growth more, the reality is the Company’s ROIC of 15.7 per cent in FQ2 (up from 12.8 per cent in prior year) suggests CGI has the ability to drive value through acquisitions,” Tse wrote.

Tse didn’t seem concerned about the slight dip in bookings, citing the normal ebb and flow from quarter to quarter and saying that up ahead he expects bookings to accelerate as enterprises resume their digital transformation programs which were paused over COVID. On geography, Tse said bookings were driven by strength in the US (up 37 per cent year-over-year) and in the UK and Australia (up 22 per cent), while the UK and Australia represented 48 per cent of bookings in the quarter.

“In terms of mix by service type, Managed IT and Business Process Services (ITO & BPO) accounted for 52 per cent of total bookings. Also important, new business accounted for 31 per cent of bookings, with notable wins including Hydro-Québec, the Dutch Ministry of Economic Affairs and Climate Policy (four-year EUR 250 million), CAIH (France’s hospital IT purchasing centre), a U.K. communication sector leader (15-year: $287 million) and Southern Company (large Southeast U.S. energy and utility company),” Tse wrote.

“A final note on bookings is that the recent strength in SI&C from a revenue perspective is often a leading indicator of bookings as early consulting assessments typically convert into long-term service contracts,” he said.

On M&A, Tse said with available liquidity of about $2.6 billion, CGI has ample capital to  pursue acquisitions as well as continue with its share buybacks.

Overall, Tse said he thinks CGI is moving back to its pre-COVID growth trajectory and may even come out with a stronger growth path than it had before the pandemic.

“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,” Tse said.