EUR 850.00 For Business Accounts Only

Morningstar | CGI Reports In-Line Full-Year Results; Bookings Remain Healthy; Shares Remain at a Premium

CGI reported full-year results that were in line with our expectations. The firm continued to see demand for its digital-services business as a driving factor behind healthy quarterly bookings growth, with the company recording a fourth-quarter book/bill of 126%. Like the third quarter, CGI is seeing good booking volume for system integration and consulting work, which is directly tied to digital-services demand. We believe this SI&C work is the tip of CGI’s spear that leads to long-term recurring follow-up work related to the management of IT and business functions. To that end, management said that its clients were looking to gradually increase their outsourcing spending over the next three years, which should help solidify CGI’s steady, albeit modest, top-line performance. As we roll our model forward one year and account for the time value of money, we raise CGI’s fair value estimate to CAD 70 from CAD 65 (our USD fair value moves to $54 from $50 based on an updated USD/CAD rate of 1.31) and reiterate our narrow economic moat rating.

We think the firm’s revenue growth will be supported by its build and buy strategy and see M&A as a key way for the firm to expand its geographic presence and IT-specific skills. CGI has ample liquidity and a lowly leveraged balance sheet (net debt to capital stands at 19%), which we expect the firm to leverage. We think further acquisitions in the United States, France, and Germany would be appealing, and while we think small to midsize acquisitions are more likely, we don’t rule out the prospect of a large transformational deal in the future.

For the quarter, reported revenue rose 7.3% year over year to CAD 2.8 billion (increased 5.0% in constant currency). On a constant-currency and year-over-year basis, revenue growth was mostly broad-based across geographies, although the U.S. federal business was notably weak, with revenue declining 6.9%. Still, the U.S. federal business can be notoriously lumpy given the awarding and contracting processes, and we don’t see this performance as particularly alarming. Additionally, the U.S. federal business recorded a strong book/bill of 174% for the full year and supports a healthy level of oncoming demand for CGI’s services.

CGI’s fourth-quarter margin performance was good, with adjusted EBIT margins improving 40 basis points year over year to 15.6%. Restructuring helped improve the margin profile of the company, and we also continue to expect margin expansion as the firm focuses on higher-margin business mix, infrastructure automation, and higher employee utilization. We think the company will be able to shift to a more asset-light business model while continuing to rotate to more valuable digital services, which should lead to modest EBIT margin expansion over the midterm.