GIB stock is still undervalued, National Bank says

Its fourth quarter is in the books and National Bank Financial analyst Richard Tse still sees double-digit upside in CGI Group (CGI Group Stock Quote, Chart, News, Analysts Financials TSX:GIB.A).

On November 8, CGI reported its Q4 and fiscal 2023 results. In the fourth quarter the company posted net earnings of $414.5-million on revenue of $3.51-billion, a topline that was up 8.0 per cent over the same period last year.

“CGI’s resilience and strong positioning — strategically, operationally and financially — underpinned our team’s ability to deliver on our profitable growth plan for the fourth quarter and fiscal year 2023,” said George D. Schindler, president and chief executive officer. “During Q4, clients prioritized cost savings and modernization initiatives, driving a 26-per-cent increase in new CGI managed services bookings compared to last year. As we look ahead, we are taking the actions necessary to further strengthen our capacity to continue delivering value for shareholders. This includes cost optimization and strategic investments to advance the next wave of innovation and growth, including the responsible use of AI [artificial intelligence], a key enabler for bringing the right mix of our end-to-end offerings to clients to help them generate the ROI [return on investment] necessary from their digitization initiatives.”

Tse gave his take on the quarter.

“CGI reported in-line FQ4 (CQ3) results with revenue growth of 8.0% Y/Y (+2.2% CC) — all organic. Most interesting to us, on a full-year basis (FY23-Sep) we estimate CGI grew faster than the market, suggesting continued share gains. The reason why the stock is off this morning is because of Management’s cautious take on the short-term outlook as enterprises are exercising caution when it comes to their technology investments — this is not unique to CGI —what’s important in our view is that it continues to execute its strategy. Our investment thesis is unchanged, particularly given what we believe to be share gains in the market.

In a research update to clients November 8, Tse maintained his “Outperform” rating and one-year price target of $175.00 on CGI Group, implying a return of 29.6 per cent at the time of publication.

Tse thinks CGI will post EBITDA of $3.03-billion on revenue of $14.96-billion in fiscal 2024. He expects those numbers will improve to EBITDA of $3.20-billion on a topline of $15.7-billion in fiscal 2025.

“All in, despite the cautious backdrop, we continue to think CGI will be a relative outperformer in our coverage group looking ahead 12-months given its defensive attributes (e.g., strong FCF generation) and growth initiatives that includes acquisitions,” the analyst concluded.