CGI Inc.
(GIB.A-T, GIB-N) C$132.79 | US$101.31
Q2/F23 Results: Momentum Expected to Continue
Event
Q2/F23 results. See our previous note for a review of the results.
Impact: POSITIVE
CGI continues to perform well amidst macro and tech sector uncertainty. The company's diverse and disciplined operations are distinguishing it from its peers and continue to be a major reason for it being our top pick. CGI's strong and stable performance is reflected in the cc organic growth sustained in the high single digits of ~8.5% y/y, even as we lap stronger y/y comparables, and expanding operating margin despite already having one of the best margins in the industry. The pipeline, bookings, and CGI's position with managed services leave us positive on continued momentum, especially as larger managed services (MS) deals are booked.
Momentum expected to continue on MS strength. We believe the H1 strength will continue into H2 as the pipeline continued to expand. New pipeline opportunities grew by 15% q/q and managed services opportunities grew by 20% q/q. Although bookings skewed to a higher mix of SI&C this quarter, due to the longer sales cycle for MS deals, we expect MS mix to grow, driving strong bookings and higher margins. In our recent meetings with management, they noted that IT budgets have not been reduced and that the appetite for outsourcing is increasing.
No financial services concerns. Financial Services performance was strong with revenue growth of ~16% y/y in cc and an estimated book/bill of 112%. Discussions with customers in the sector remain consistent to discussions prior to the turmoil. Management highlighted that their bank customers primarily consist of the largest banks in their respective markets, suggesting that CGI is shielded from the issues.
Disciplined on M&A. The M&A pipeline remains active with 25% of it related to IP. Acquisition integrations continue to progress well with organic growth in markets where they made acquisitions exhibiting faster growth rates. We believe this is largely due to CGI's ability to cross-sell services into those acquired relationships to "harvest" organic growth.
TD Investment Conclusion
We maintain our BUY rating and are increasing our target price to $160. We remain positive on CGI given its strong organic growth, expanding margins, and solid balance sheet.