Desjardins Securities analyst Jerome Dubreuil cut his forecasts for IT Service providers to reflect higher interest rates and the downside risk for near-term estimates, acknowledging soaring interest in artificial intelligence is “showing promising signs of growth” but warning investors it is “not material yet.”
“Recent updates from global IT service providers suggest that macro uncertainty and/or elevated interest rates are affecting near-term demand for IT services,” he said. “We still believe that medium- and longterm digitization prospects are robust as a large portion of the corporate world acknowledges that having strong digital capabilities continues to be an excellent way to adjust recurring cost structures to their respective evolving environment. We generally expect estimates for the next few quarters to come down in the coming weeks.”
Mr. Dubreuil noted IT service providers have “performed relatively well compared with the S&P 500 during past periods of rapid interest rate increases as well as decreases.”
“IT Services may look fundamentally expensive but we believe the sector remains attractive in relation to the S&P 500,” he added. “Despite a decline in valuations from their peak at the close of 2021, current valuations are aligned with 2019 levels. However, it is important to note that interest rates are substantially higher than they were during that period, and the anticipated growth for the coming year is notably lower vs growth expectations at that time. ... IT service providers’ valuation look better when compared with the S&P 500. Indeed, the valuation spread between the sector and the index is tighter than it has been historically even though the sector shows attractive characteristics including stable free cash flow generation, nimble business models and defensive properties stemming from increased investments in technology from companies implementing cost-cutting initiatives.”
The analyst made these target adjustments:
* CGI Group Inc. ( “buy”) to $152 from $154. The average on the Street is $148.57.
“Our forecast is now slightly below the Street’s as we believe organic growth should continue to slow in light of recent results from global peers,” he said. “GIB’s relatively small exposure to consulting (which is more discretionary), high exposure to the government vertical, and recent strong bookings should help protect its results.”
* Quisitive Technology Solutions Inc. ( “buy”) to 60 cents from 80 cents. Average: 88 cents.
“The company is not immune to headwinds in cloud, and its liquidity situation appears tighter than we had previously thought despite its reasonable leverage. We are closely monitoring its strategic review, which could be a catalyst for value creation down the road,” he said.
* Alithya Group Inc. ( “buy”) to $3.15 from $3.30. Average: $3.38.
“Our estimates are broadly in line with expectations but we expect questions on the company’s ability to meet run-rate guidance at the end of the fiscal year in March amid challenges in the financial services vertical,” he said.
His target for Converge Technology Solutions Corp. ( “buy”) remains $4.50, below the $5.33 average.
“The company pre-released an 8-per-cent adjusted EBITDA beat in the quarter (at the mid-point of guidance), with double-digit organic growth in gross profit,” said Mr. Dubreuil. “This is a step in the right direction but we believe investors are still waiting to see more consistency in results.”