Scotia Research -A Long Runway Ahead Calling it “a solid investment with robust upside potential,” Scotia Capital analyst Divya Goyal assumed coverage of CGI Inc. (
) with a “sector outperform” rating, seeing it as “undervalued” given its “depth and long-term growth potential.”
“CGI has, over the years, methodically established a well-orchestrated business with robust clientele, which, we believe, will generate recurring business for the company; however, in our opinion, that will only help sustain the current profitability of the business,” she said. “We believe accretive acquisitions will be the true enabler of CGI’s long-term growth; CGI’s acquisition strategy – which involves expanding the business footprint through key metro market acquisitions, followed by deepening the footprint through transformative acquisitions – should enrich CGI’s product suite while augmenting its current clientele. The company’s capital allocation priorities right now include internal investments imperative for organic growth, mergers and acquisitions (M&A), and share buybacks, which we think will collectively enhance the shareholder value.”
In a research report titled A Long Runway Ahead!, Ms. Goyal emphasized CGI’s “strong” leadership and succession planning, which she thinks defines the company’s long-term outlook.
“CGI is founder-led business and all senior executives have been with the company for more than a decade, having joined either as consultants or through a transformative business acquisition,” she noted. “The company takes a structured approach to its leadership: as part of their professional development, each executive rotates through various divisions before becoming a leader of a certain segment or division. We believe this has created an extremely knowledgeable team of technology leaders well versed in CGI’s business model and client specifics. Furthermore, these leaders are called ‘members,’ because they, like other CGI employees, are company owners (through CGI’s share purchase plan),which instills a sense of accountability. While we think this approach solidifies the company’s existing governance structure, succession planning is a key issue for us. Founder and Executive Chairman Serge Godin established the company in 1976 and currently controls 53 per cent of the company’s voting rights.”
The analyst set a target of $130 per share. The current average is $127.92.
“GIB.A is currently trading at a approximately 10 times next 12 months (NTM) EV/EBITDA multiple (16 times NTM P/E multiple),” said Ms. Goyal. “Given our expanding coverage universe of North American technology service providers, we reviewed CGI’s performance across a broad array of global technology service providers (currently trading at an average NTM EV/EBITDA multiple of 12.5 times), considering common sector themes. Based on our analysis of the peer composite, we believe CGI is an underappreciated stock given the robustness of its business model and financial wherewithal, including its double-digit EBITDA margin and solid free cash flow (FCF) growth, which, per our estimates, will generate 22-per-cent ROE and 17-per-cent ROIC by F2024, justifying the premium to its current valuation.”