This rising Canadian company plans to double its size in the next five to seven years.
It has a good chance of doing so as more businesses and governments outsource their complex computing functions. With its “Build and Buy” strategy, this outsourcing specialist expands relationships with current clients and also grows by acquisition. The company keeps adding contracts, and its shares are up 24% since the start of the year.
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CGI GROUP INC. (Toronto symbol GIB.A; www.cgi.com) is Canada’s largest provider of computer-outsourcing services. It helps its clients automate routine functions such as accounting and buying supplies. That makes those firms more efficient and lets them focus on their main businesses.
CGI follows what it calls its “Build and Buy” strategy. The “build” part refers to the expansion of its relationships with current clients as well as the development of new ones. The “buy” part involves making acquisitions. CGI tempers the risk of buying other companies by targeting firms that complement its expertise or help it expand geographically. Its biggest purchase to date was the August 2012 acquisition of U.K.-based outsourcing firm Logica for $2.7 billion.
The company aims to double its size in the next five to seven years, probably through another big acquisition. Meantime, it continues to acquire smaller firms that expand its presence in certain markets.
The company continues to focus on more-profitable fields such as cloud-based software services. It now has over 150 programs that help its clients manage their payment systems, electronic records and cyber security needs.
In its fiscal 2018 third quarter, ended June 30, 2018, CGI’s earnings improved 11.2%, to $309.7 million from $278.5 million a year earlier. Per-share profits rose 16.1%, to $1.08 from $0.93, on fewer shares outstanding.
Those figures exclude costs related to a restructuring plan, which cut jobs and closed unneeded offices. In all, CGI expects to spend $185.0 million on severance payments and other related costs. The company has yet to reveal how much savings will result from the plan, but expects to see most of the benefits in fiscal 2018.
If you disregard all unusual items, the latest earnings matched the consensus estimate.
Revenue in the quarter gained 3.7%, to $2.94 billion from $2.84 billion. CGI gets 85% of its revenue from outside of Canada, so if you factor out currency exchange rates, revenue in the quarter rose 3.8%. That gain is mainly due to new contracts and contract renewals for most regions, particularly the U.S., Canada, France, Northern Europe and Asia.
Growth stocks: Five-year French railway deals are “major” contracts
CGI signed $3.47 billion in contracts during the third quarter. That’s up 29.7% from $2.68 billion a year earlier. The company also continues to do a good job replacing older contracts with new deals: in the past 12 months, the value of new bookings equalled 113.8% of the contracts completed over that time.
CGI has jumped 24% since the start of 2018, partly because it continues to win new contracts. As of June 30, 2018, its contract backlog was $22.4 billion. That’s 2.0 times the company’s annual revenue.
In March 2018, CGI won two contracts from SNCF, which operates France’s railway network. Under those deal, the company will help SNCF upgrade and manage its human resources information systems for its 180,000 employees.
CGI has yet to reveal how much those five-year deals are worth. However, it calls them “major” contracts. As well, deals like those enhance its reputation and should help it win more contracts in Europe.
The company does not pay a dividend. Instead, it prefers to buy back shares. In April 2018, the company repurchased and cancelled 3.2 million class A subordinate voting shares held by Serge Godin, its founder and executive chairman. That purchase is part of CGI’s plan to buy back up to 20.6 million class A shares, or 8% of the total outstanding, by February 6, 2019.
Even after the stock’s recent jump, it still trades at a reasonable 20.3 times the $4.18 a share it will likely earn for the fiscal year ending September 30, 2018.
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