CGI is a great defensive tech play, says National Bank

Investors looking for a defensive play within the tech sector that also holds lots of organic and inorganic growth potential should be thinking about CGI (CGI Inc Stock Quote, Charts, News, Analysts, Financials TSX:GIB.A). That’s the news from National Bank Financial Markets analyst Richard Tse who reviewed CGI’s latest quarterly results in a Wednesday report. Tse said CGI’s solid quarter was highlighted by increasing profit margins and continuing topline momentum.

Canada’s largest tech company with a global workforce of over 88,500, Montreal-headquartered CGI released on Wednesday its third quarter fiscal 2022 financials. They featured revenue up 11.5 per cent year-over-year to $3.26 billion and adjusted EBIT up 9.0 per cent to $519.9 million. Diluted EPS was up 11.0 per cent to $1.51 per share and cash from operating activities was $419.2 million, representing 12.9 per cent of revenue. 

“In the third quarter of fiscal 2022, we continued delivering on our build & buy profitable growth strategy with double digit increases year-over-year in both revenue and EPS,” said George D. Schindler, President and CEO, in a press release. “We are well structured through our portfolio of services and strong balance sheet to help our clients navigate the current economic environment while continuing to drive the growth and profitability of our business.”

CGI said its bookings for the quarter were $3.410 billion compared to $3.634 for Q3 2021, while the company’s backlog stood at $23.238 billion compared to $23.345 billion a year earlier. 

Looking at the numbers, Tse called them solid and noted that the 11.5 per cent rise in revenue likely contained about 6.6 per cent organic growth. Tse said even more impressive was CGI’s ability to preserve margins within the currently tight labour market, posting a 20 basis point year-over-year increase in adjusted EBIT margin to 16 per cent, although that number was flat sequentially from fiscal Q2.

CGI’s topline of $3.26 billion was a little under Tse’s estimate at $3.22 billion, while the consensus estimate was for $3.22 billion. Adjusted EPS of $1.54 per share was on the money, as both Tse and the Street were calling for the same.

“In our view, CGI’s ability to preserve and even expand margins speaks to its operating prowess. On the acquisition side, based on our recent discussions with management and a pullback in market valuations, we’re confident the Company remains on the path to deploying ~$1 billion towards acquisitions this fiscal year. Notably, while we’d value organic growth more, the reality is the Company’s ROIC of 15.8 per cent in FQ3 (up from 13.8 per cent in prior year) suggests CGI has the ability to drive value through acquisitions,” Tse wrote.

With a market cap of $26 billion, CGI’s share price is down about six per cent over the past year and down about 2.5 per cent year-to-date. With his update, Tse reiterated an “Outperform” rating on CGI and a $135.00 target price, which at the time of publication represented a projected one-year return of 24.6 per cent.

Tse said CGI’s bookings should accelerate as enterprises resume their digital transformations, many of which were paused over the pandemic. The analyst also noted that digital IP represented about 20 per cent of revenue for the quarter, which was down about two per cent year-over-year due to the onboarding of acquisitions which brought on non-IP revenue. Tse said management has renewed its goal, set in the mid-2010s, of “IP30,” aiming to reach 30 per cent IP-based revenue by fiscal 2025. 

“In our view, that commitment is positive given that it not only offers a higher margin profile but also enhances the attach and renewal rates. Looking forward, we expect an uptick in IP revenue as Management disclosed that the IP pipeline is at a two- year high with opportunities having a projected decision date in the NTM, up 54 per cent year-over-year,” Tse said.

“Bottom line, we continue to believe CGI will benefit from a resumption of digital transformation projects that were paused by COVID and against the current macro backdrop, we see GIB.a offering an attractive risk-to-reward with considerable defensive attributes (long-term contracts, recurring cash flow),” Tse said.