qeic tech - cgi group pitch - final - seeking alpha.pdf

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


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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


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4/16

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


5/16

Company Overview


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.


6/16

Company Overview


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


7/16

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


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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


9/16

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


10/16

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


11/16

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


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


15/16

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


16/16

Summary - Price Target


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

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