Shares of CGI Group (CGI Group Stock Quote, Chart, News, Analysts, Financials TSX:GIB.A )hit an all-time high in 2023, but National Bank Financial analyst Richard Tse thinks the best may be yet to come.
In a research update to clients August 26, Tse maintained his “Outperform” rating and one-year price target of $175 on CGI, implying a return of 32.5 per cent at the time of publication.
“We continue to believe CGI has more potential for outperformance (relative to peers) given its prowess in cost optimization services, robust growth profile and attractive defensive attributes (e.g., recurring revenue and cash flow, long-term contracts). We reiterate our Outperform rating and $175 DCF target which implies a valuation of 14.3x EV/EBITDA on our F2024 estimates,” the analyst wrote.
But Tse tempers his expectations against a sector backdrop that he says is defined by growing risk.
“ISG’s (an industry consulting firm) most recent global update showed global Average Contract Values (ACV) for Managed IT Services in CQ3 (FQ4’23 for CGI) up 11.8% Y/Y (+4% Q/Q) to $10.4 bln, an all-time high,” the analyst noted. “That strong performance appears to have been driven by nine mega deals (i.e., ACV >$100 mln) in Q3 (27 YTD – the most since 2014) as smaller deal sizes remain under pressure. From a geographic perspective, the Americas region is driving the bulk of that growth with ACV up 25% Y/Y (+33% Q/Q) while EMEA faces some modest headwinds (-2.6% Y/Y). Looking ahead, ISG increased its growth forecast for Managed Services in CY23, despite mounting macro headwinds to 5.4% Y/Y (was 5.0% Y/Y).”
CGI Group stock reached its highest close price ever, C$141.62 on Friday July 14th 2023.
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