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8/9/2019 QEIC Tech - CGI Group Pitch - Final - Seeking Alpha.pdf
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CGI Group Pitch (GIB.A-T)
Jonathan J. Chang
BComm, 2017
Aditya Patel
BA, Economics, 2015
Ziyi Jin
BA, Economics, 2016
Matas riu ikis
BA, Economics, 2017
January 13, 2014
This presentation is for informational purposes only, and is not an offer to buy or sell or a solicitation to buy or
sell any securities, investment products or other financial product or service, an official confirmation of any
transaction, or an official statement ofQueens Economics Investment Council (QEIC). Any views or opinionspresented are solely those of the author and do not necessarily represent those of QEIC.
TECHNOLOGY, MEDIA, AND TELECOMMUNICATIONS
8/9/2019 QEIC Tech - CGI Group Pitch - Final - Seeking Alpha.pdf
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Industry
Breakdown
Company
Overview
Management
Team
Investment
Thesis Point #1
Investment
Thesis Point 2
Investment
Thesis Point 3
Investment
Thesis Point 4
Company
Valuation
Projected
Catalysts
Associated
Risks
Price Target
Summary
Appendix
Our Agenda
8/9/2019 QEIC Tech - CGI Group Pitch - Final - Seeking Alpha.pdf
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8/9/2019 QEIC Tech - CGI Group Pitch - Final - Seeking Alpha.pdf
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30.00
35.00
40.00
45.00
50.00
55.00
Jan-06-2014 Mar-11-2014 May-14-2014 Jul-18-2014 Sep-23-2014 Nov-26-2014
Information Technology Sector Breakdown
4Sources: Capital IQ
S&P/TSX Composite Index Technology Hardware & Equipment (Industry Group)
S&P/TSX Composite Index Software & Services (Industry Group)
2,200
2,400
2,600
2,800
3,000
3,200
3,400
6-Jan-2014 6-Apr-2014 5-Jul-2014 3-Oct-2014 1-Jan-2
Similar LTM Growth by Less Volatility (than above graph) ->
Indication of Better Opportunities Measured on a Risk-Return Basis
8/9/2019 QEIC Tech - CGI Group Pitch - Final - Seeking Alpha.pdf
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Company Overview
5Sources: Capital IQ
CGI Group Business Description
Price Volume Performance
Financial Metrics (CDN, MM)
Total Revenue 10,499.7 Market Capitalization 13,611.4 TEV/Total Revenue 1.5x
EBITDA 1,678.0 Total Enterprise Value 15,766.2 TEV/EBITDA 9.4x
EBIT 1,364.0 Cash & ST Invst. 535.7 P/Diluted EPS Before Extra 16.2x
Net Income 859.4 Total Debt 2,690.6 Price/Tang BV NM
Capital Expenditure (181.5) Total Assets 11,234.1 Total Debt/EBITDA 1.6x
Currency in CAD in mm, LTM as of Sep-30-2014 TEV and Market Cap are calculated using a close price as of Jan-06-2015
M
1M
1M
2M
2M
3M
3M
4M
4M
5M
30
32
34
36
38
40
42
44
46
Jan-07-2014 May-07-2014 Sep-07-2014 Jan-07-2015
Volume Price
Provides information technology (IT) and business process
services. It offers a range of IT and management consultingservices
Provides business solutions, which include Momentum, an
integrated enterprise resource planning suite; CGI
Advantage, an enterprise resource planning solution for
back office operations; and credit services solutions
comprising Collections360, Gateway360, CACS, CACS-G,
ACAPS, Bureaulink, Strata
Primarily serves financial services, government, health,
telecommunications and utilities, manufacturing, and retail
and distribution markets.
8/9/2019 QEIC Tech - CGI Group Pitch - Final - Seeking Alpha.pdf
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Company Overview
6Sources: Capital IQ
Specifications of CGI Company Operations
World Map
The company operates in Canada; the United States; the Nordics, Southern Europe, and South
America; Central and Eastern Europe, including the Netherlands, Germany, and Belgium; the United
Kingdom; the Asia Pacific comprising Australia, India, the Philippines and the Middle East; and France,
including Luxembourg and Morocco
CGI Group Inc. was founded in 1976 and is headquartered in Montral, Canada.
Canada and
United States
Montreal Headquarters
Europe
Asia Pacific
South
America
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Executive Team
7Sources: Capital IQ, CGI Company Website
Founded CGI in1976 at age of 26
Lead until 2006
Grew from 2employees to68,000
Inducted intoCanadian BusinessHall of Fame in 2008
With CGI since 2003
SVP of corporatedevelopment andstrategic investments
Prior was president ofCDP capital (a privateequity firm)
Served as executiveVP, and CFO atTeleglobe from 1992to 200
Appointed in 2006
Prior wasPresident and COOsince 2002
Was president andCEO of Bell Sygma a Bell Canadasubsidy
Since Oct 2014
From 2006 to 2004,he was SVP andCorporate Controller
Joined CGI in 1998as Director ofProject Accounting
Past strongexperience
Michael Roach, CEO
Francois Boulanger, CFO
Serge Godin, Chairman/Founder
Claude Seguin SVP Corp Dev
Appointed in 2012
Prior was global
marketing lead for the
financial services
industry at CGI since
2009
Worked in
management at
American
Management Systems
Leads team of CIOs
and CTOs whichdeliver enterprisewide IS/IT servicesand solutions to CGI
Prior worked inCGIs globalinfrastructure group
More than 30 years
of experience
Eva Maglis, CIO
Jame Cofran, SVP & CMO
8/9/2019 QEIC Tech - CGI Group Pitch - Final - Seeking Alpha.pdf
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Investment Thesis Outline
8Sources: Capital IQ, ThomsonOne Analytics
CEO sets eyes on doubling size of CGI within 5-7years
Excess cash aims to be directed towards UScommercial markets
Has done solid job of managing previousacquisitions
Few competitors in this space
Has government contracts that result in 98%renewal rate, making it hard for others to enter
2nd highest revenue amongst ICT companies inCanada
The company is experiencing positive cash flow
and has multiple areas to spend on Decline in integration payments for Logica is
one of the immediate drivers for FCFimprovement
Expecting improvements from current cost
restructuring More opportunities available in Europe Shifting focus towards higher margin in
Software/IP revenue
I: Increasing FCF Generation
II: Increasing EBIT Margins
III: Increasing Growth Through M&A IV: Brand Positioning & Market Dominance
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Argument I: Increasing FCF Generation
9Sources: Capital IQ, Barclays Research, Equity Research Reports, RBC Capital Markets
Predicted generation of $1.17B in free cash flowin FY16 compared to $842M in FY14
Drivers include: Margin expansion
Prudent working capital management Reduced Logica (subsidy) integration payments Perceived growth in Logica
Logica is multinational IT and managementconsultancy company headquartered in the UKwhich is a wholly owned subsidy of CGI Group
2.5 years since acquisition of Logica and CGI isbeginning to normalize
Integration of Logica completed one yearahead of schedule
Decline in integration spending Management invested $576m ($51m more than
target) to yield access of $400m in annualsavings (up from $375m) from integration ofLogica
France, Netherlands, and Belgium stillwaiting on showing improved performancedue to local labour regulations
Free Cash Flow Profile (CDN mlns)
Positive Outlook Decline in Spending
$0
$200
$400
$600
$800
$1,000
$1,200
$1,400
2011 2012 2013 2014 2015E 2016E
8/9/2019 QEIC Tech - CGI Group Pitch - Final - Seeking Alpha.pdf
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Argument II: Increasing EBIT Margins
10Sources: Capital IQ, Barclays Research, Equity Research Reports, RBC Capital Markets
Contracts expiring in Europe Continuation of optimizing its operations and
improving utilization in some markets Recent restructuring in Finland New low cost delivery centers
Seeing more opportunities available in Europe
Leaving unprofitable countries Looking to focus more so on higher margins in
increased mix of software/IP revenue Looking to globalize existing software/IP
(intellectual property) Customizing projects for multiple clients
EBIT Margin Improvements
Run-Off of Low Margin Contracts Exit from Unprofitable, Sub-Scale Countries
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Argument III: Increasing Growth Through M&A
11Sources: Capital IQ, Equity Research Report, Barclays
US Commercial Market: management sees CGIas being relatively under-indexed
US Federal Market: management seesopportunities at attractive valuations and thecompany has significant experience
Estimated $6bn in acquisitions over next 5 yearcan add $2 to $11 in share price
Management sees growth in Australia wherethere are similarities to Canada 10 years ago interms of the stage in market consolidation
CEO Michael Roach set on doubling size of CGI
in 5 to 7 years Half of growth from acquisitions, other half fromacquisitions
Increased focus on corporate developmentpractices
No hostile takeovers typically in industry sodeals may take years to develop
For example, Logica was planned since 2007 forits 2012 acquisition
Management rarely pays over 1 x revenue andtargets acquisitions that will be accretive in firstyear
Management looking to grow IP revenues from
16% today to 30% Proprietary software is attractive to CGI
because it drives stickier revenue Overs high margins 20-40% vs. mid-teens Niche software could provide CGI with
preferred status for bidding for contracts
Summary
Growing IP Revenues
US Federal Market and Commercial Markets
Australia
Past Transactions
Acquired
$3,441.21mm
May 31, 2012
Acquired
$1,063.81mm
Aug. 16, 2010
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Argument IV: Brand Positioning & Market Dominance
12Sources: Capital IQ, finviz.com, Branham
Moved from 6 to 2 in ICT ranking surpassing the
Big Three
Competitors have little room to grow into CGIs
share MDA has low focus on professional services
Held top ICT Professional Services Position for
10 years
Top ICTs in Canada
Top ICT Professional Services by Revenue Growth
Company Name ICT Ranking Professional Services Market Cap
Blackberry 1 - 5.39BCGI Group 2 1 10.87B
BCE 3 - 39.99B
Telus 4 - 21.9B
Rogers 5 - 20.32B
Celestica 6 - 1.8B
Shaw Communications 7 - 11.7B
CAE 8 - 3.23B
MDA Ltd. 9 2 3.29B
OpenText 10 - 7.09B
10.08
1.81.09
0 0.325
0
2
4
6
8
10
12
CGI MDA Ltd. Softchoice Procom
Consultants
Group
OnX Enterprise
Solutions Inc.
Revenue
inB
illions
Second largest ICT in Canada
Few large competitors inProfessional Services
Second highest revenue for
ICT in Canada
Commentary
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Valuation
Public Company Comparables
13Sources: Capital IQ
CGI: Trading at a relative discount to all multiples
Key to Note:
No dividend yield in comparison to peers
Higher FCF Margin %
Use of international comparables with similar market cap
Market Enterprise EV / EBITDA FCF Dividend P / E EV / Revenue
Company Name Cap Value LTM 2014E 2015E Margin % Yield 2014E 2015E 2014E 2015E
Cogni za nt Technol ogy Sol uti ons (Na sda qGS:CTSH) $32,059.5 $27,441.0 13.4 x 13.0 x 11.1 x 11.30% - 20.5 x 18.0 x 2.8 x 2.7 x
Infosys Ltd. (BSE:500209) $35,472.1 $30,355.0 12.7 x 12.8 x 11.4 x 15.17% 0.0% 18.5 x 16.5 x 3.6 x 3.6 x
Cap Gemini S.A. (ENXTPA:CAP) $10,736.9 $10,615.2 9.1 x 8.1 x 7.4 x 5.15% 1.9% 16.0 x 14.4 x 0.9 x 0.9 xTa ta Cons ul ta ncy Se rvi ce s Li mi te d (BSE:532540) $74,784.4 $73,016.4 17.4 x 16.6 x 14.2 x 15.51% 1.3% 22.0 x 18.9 x 5.2 x 4.8 x
Atos SE (ENXTPA:ATO) $8,476.8 $8,435.5 7.9 x 7.5 x 6.4 x (1.38%) 1.1% 14.4 x 12.2 x 0.8 x 0.8 x
Booz Al len Hamil ton Holding (NYSE:BAH) $3,970.1 $5,373.8 10.4 x 10.1 x 9.7 x 7.89% 13.1% 16.6 x 16.3 x 1.0 x 1.0 x
Leidos Holdings, Inc. (NYSE:LDOS) $3,190.1 $4,001.1 9.2 x 9.4 x 9.2 x 8.03% 3.0% 18.7 x 17.1 x 0.8 x 0.8 x
Open Text Corporation (NasdaqGS:OTEX) $6,858.5 $7,672.0 14.9 x 11.4 x 10.7 x 20.17% 1.2% 14.5 x 13.5 x 4.4 x 4.0 x
Wipro Ltd. (BSE:507685) $20,995.8 $18,748.7 11.3 x 11.0 x 9.8 x 9.90% 1.5% 15.5 x 13.9 x 2.6 x 2.5 x
Computer Sciences Corporation (NYSE:CSC) $8,791.9 $9,683.9 4.8 x 4.5 x 4.3 x 8.49% 1.5% 13.5 x 12.4 x 0.8 x 0.8 x
Mean $20,533.6 $19,534.3 11.1 x 10.4 x 9.4 x 10.02% 2.7% 17.0 x 15.3 x 2.3 x 2.2 x
Median $9,764.4 $10,149.6 10.9 x 10.5 x 9.7 x 9.20% 1.5% 16.3 x 15.3 x 1.8 x 1.8 x
CGI Group, Inc. (TSX:GIB.A) $11,522.4 $13,338.6 9.4 x 8.4 x 8.2 x 10.09% - 13.8 x 12.9 x 1.5 x 1.5 x
Relative Discount to Mean (44%) (32%) (15%) (19%) (13%) 1% - (19%) (16%) (34%) (32%)
Relative Discount to Median 18% 31% (13%) (20%) (16%) 10% - (15%) (16%) (17%) (16%)
Commentary
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Catalysts
14Sources: Capital IQ, Equity Research Reports
Last acquisition in 2012 of Logica led to $400
million in annual realized synergies With free cash flow and $536 million in cash, it
is likely a similar acquisition will be made in2015
Been excellent at identifying, purchasing, andintegration acquisitions.
Generated free cash flow of perviousacquisition in less than 2 years
Likely to be going after US commercial market
European economy ramping up and outlook isstrengthening
Will lead to increase in revenue FY15 for Logica,one of CGIs earlier acquisitions that operates in
Europe Growth in economy will help increase recurring
revenue, mostly caused by signing longer termcontracts
Upcoming Potential Acquisitions
Economic Recovery
Revenue Breakdown
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Risks
15Sources: Equity Research Reports
55-60% of revenue for US
operation from US government
14% of total revenue
Change in government spendingcould impact CGI severely
Government Gridlock
Departure of Management
US Gov. Spending
Plan to double size of CGI in 5-7
years
Majority of Growth from M&A
Challenge finding accretiveacquisitions
CGI could fail to meet growthexpectations
Unable to find Acquisition Target
Company based on information and infrastructure
Exposed to loss of Data, unauthorized access, and
destruction of data
Any breach in CGI can be detrimental to CGIsreputation
Impacting their ability to obtain or retain clients
CGI Reports results in Canadian Dollars
Majority of revenues and costs are in foreign currencies
Strong Canadian dollar relative to other currencies
could negatively impact financial performance
Information Loss (Hurting IT Consulting) Forex Volatility
- Senior management departures
negatively impact sentiment
and financial performance
- Turnover of key employees due
to lack of effective
management
- Highly complex projects with
stringent requirements and
tight deadlines
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Summary - Price Target
16Sources: Capital IQ
Indicative Valuation Graph Implied Return
$51.61
$49.35
$49.78
$43.81
$47.93
$53.84
$53.26
$53.02
$49.83
$51.70
$45.76
$48.01
$70.38
$67.49
EV / EBITDA LTM
EV / EBITDA 2014E
EV / EBITDA 2015E
P / E 2014E
P / E 2015E
EV / Revenue 2014E
EV / Revenue 2015E
Analyst Price Targets Capitalization Table
Share Price $43.85
Dil. Shares O/S 311.0
Market Capitalization $13,637.4
- Cash & Equivalents $535.7
+ Total Debt $2,690.6
+ Pref. Equity -
+ Minority Interest -
= Total EV $15,792.3
Current Share Price $44.34
Target Share Price $50.00Equity Upside 12.8%
Dividend Yield -
Suggested Return 12.8%
$46.00
$47.00
$47.85
$48.00
$49.00
$50.00
Desjardins Capital Markets
RBC Capital Markets
Salman partners
Credit Suisse
Raymond James
Our Target Price