CGI Group Pitch (GIB.

A-T)
TECHNOLOGY, MEDIA, AND TELECOMMUNICATIONS
Jonathan J. Chang

January 13, 2014

BComm, 2017

Aditya Patel

BA, Economics, 2015

Ziyi Jin

BA, Economics, 2016

Matas Sriubikis

BA, Economics, 2017

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 of Queens Economics Investment Council (QEIC). Any views or opinions
presented are solely those of the author and do not necessarily represent those of QEIC.

Our Agenda

Industry
Breakdown

Company
Overview

Investment
Thesis Point #2
Projected
Catalysts

Investment
Thesis Point #3
Associated
Risks

Management
Team

Investment
Thesis Point #1

Investment
Thesis Point #4
Price Target
Summary

Company
Valuation
Appendix

Sector Overview
S&P 500 Sector Indices - Information Technology Sector
710
690
670
650
630
610

Industry Positive
Growth

590
570
550
6-Jan-2014

6-Apr-2014

5-Jul-2014

3-Oct-2014

1-Jan-2015

S&P 500 Sector Indices - Telecommunication Services Sector

170
165
160

155
150

Stagnant Growth

145
140
6-Jan-2014

Sources: Capital IQ

6-Apr-2014

5-Jul-2014

3-Oct-2014

1-Jan-2015

Information Technology Sector Breakdown

S&P/TSX Composite Index Technology Hardware & Equipment (Industry Group)
55.00
50.00

45.00
40.00
35.00
30.00
Jan-06-2014

Mar-11-2014

May-14-2014

Jul-18-2014

Sep-23-2014

Nov-26-2014

S&P/TSX Composite Index Software & Services (Industry Group)

3,400
3,200

Similar LTM Growth by Less Volatility (than above graph) ->

Indication of Better Opportunities Measured on a Risk-Return Basis

3,000
2,800
2,600
2,400
2,200
6-Jan-2014

Sources: Capital IQ

6-Apr-2014

5-Jul-2014

3-Oct-2014

1-Jan-2015

Company Overview
CGI Group Business Description
Provides information technology (IT) and business process
services. It offers a range of IT and management consulting
services

Price Volume Performance

46

5M

44

4M
4M

42

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

40

Primarily serves financial services, government, health,

telecommunications and utilities, manufacturing, and retail
and distribution markets.

32

3M
3M

38
2M
36

2M

34

30
Jan-07-2014

1M
1M

May-07-2014

Sep-07-2014

Volume

M
Jan-07-2015

Price

Financial Metrics (CDN, MM)

Total Revenue

10,499.7 Market Capitalization

EBITDA

1,678.0 Total Enterprise Value

EBIT

1,364.0 Cash & ST Invst.

Net Income
Capital Expenditure

859.4 Total Debt

(181.5) Total Assets

13,611.4 TEV/Total Revenue

1.5x

15,766.2 TEV/EBITDA

9.4x

535.7 P/Diluted EPS Before Extra

2,690.6 Price/Tang BV
11,234.1 Total Debt/EBITDA

16.2x
NM
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

Sources: Capital IQ

Company Overview
World Map

Europe

Canada and
United States

Montreal Headquarters

South
America
Asia Pacific

Specifications of CGI Company Operations

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.

Sources: Capital IQ

Executive Team
Michael Roach, CEO

Francois Boulanger, CFO

Appointed in 2006

Since Oct 2014

Prior was
President and COO
since 2002

From 2006 to 2004,

he was SVP and
Corporate Controller

Was president and

CEO of Bell Sygma
a Bell Canada
subsidy

Joined CGI in 1998

as Director of
Project Accounting

Past strong
experience

Serge Godin, Chairman/Founder Claude Seguin SVP Corp Dev

Founded CGI in
1976 at age of 26

Lead until 2006

Grew from 2
employees to
68,000

Inducted into
Canadian Business
Hall of Fame in 2008

Sources: Capital IQ, CGI Company Website

Eva Maglis, CIO

Leads team of CIOs

and CTOs which
deliver enterprise
wide IS/IT services
and solutions to CGI

Prior worked in
CGIs global
infrastructure group

More than 30 years

of experience

Jame Cofran, SVP & CMO

With CGI since 2003

Appointed in 2012

SVP of corporate
development and
strategic investments

Prior was president of

CDP capital (a private
equity firm)

Prior was global

marketing lead for the
financial services
industry at CGI since
2009

Worked in
management at
American
Management Systems

Served as executive
VP, and CFO at
Teleglobe from 1992
to 200

Investment Thesis Outline

I: Increasing FCF Generation

II: Increasing EBIT Margins

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 FCF
improvement

Expecting improvements from current cost

restructuring
More opportunities available in Europe
Shifting focus towards higher margin in
Software/IP revenue

III: Increasing Growth Through M&A

IV: Brand Positioning & Market Dominance

CEO sets eyes on doubling size of CGI within 5-7

years
Excess cash aims to be directed towards US
commercial markets
Has done solid job of managing previous
acquisitions

Few competitors in this space

Sources: Capital IQ, ThomsonOne Analytics

Has government contracts that result in 98%

renewal rate, making it hard for others to enter
2nd highest revenue amongst ICT companies in
Canada

Argument I: Increasing FCF Generation

Free Cash Flow Profile (CDN mlns)
$1,400
$1,200
$1,000
$800
$600
$400

$200
$0
2011

2012

2013

2014

2015E

2016E

Positive Outlook

Decline in Spending

Predicted generation of $1.17B in free cash flow

in FY16 compared to $842M in FY14
Drivers include:

2.5 years since acquisition of Logica and CGI is

beginning to normalize
Integration of Logica completed one year
ahead of schedule
Decline in integration spending
Management invested $576m ($51m more than
target) to yield access of $400m in annual
savings (up from $375m) from integration of
Logica
France, Netherlands, and Belgium still
waiting on showing improved performance
due to local labour regulations

Margin expansion
Prudent working capital management
Reduced Logica (subsidy) integration payments
Perceived growth in Logica

Logica is multinational IT and management

consultancy company headquartered in the UK
which is a wholly owned subsidy of CGI Group

Sources: Capital IQ, Barclays Research, Equity Research Reports, RBC Capital Markets

Argument II: Increasing EBIT Margins

EBIT Margin Improvements

Run-Off of Low Margin Contracts

Exit from Unprofitable, Sub-Scale Countries

Contracts expiring in Europe

Continuation of optimizing its operations and
improving utilization in some markets

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

Recent restructuring in Finland

New low cost delivery centers
Seeing more opportunities available in Europe

Sources: Capital IQ, Barclays Research, Equity Research Reports, RBC Capital Markets

10

Argument III: Increasing Growth Through M&A

Summary
CEO Michael Roach set on doubling size of CGI
in 5 to 7 years

Half of growth from acquisitions, other half from

acquisitions

Increased focus on corporate development

practices
No hostile takeovers typically in industry so
deals may take years to develop

For example, Logica was planned since 2007 for

its 2012 acquisition

Management rarely pays over 1 x revenue and

targets acquisitions that will be accretive in first
year

US Federal Market and Commercial Markets

US Commercial Market: management sees CGI
as being relatively under-indexed
US Federal Market: management sees
opportunities at attractive valuations and the
company has significant experience
Estimated $6bn in acquisitions over next 5 year
can add $2 to $11 in share price

Sources: Capital IQ, Equity Research Report, Barclays

Growing IP Revenues
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

Australia
Management sees growth in Australia where
there are similarities to Canada 10 years ago in
terms of the stage in market consolidation

Past Transactions

Acquired

Acquired

$3,441.21mm
May 31, 2012

$1,063.81mm
Aug. 16, 2010

11

Argument IV: Brand Positioning & Market Dominance

Commentary

Top ICTs in Canada

Company Name
Blackberry
CGI Group
BCE
Telus
Rogers
Celestica
Shaw Communications
CAE
MDA Ltd.
OpenText

ICT Ranking
1
2
3
4
5
6
7
8
9
10

Professional Services
1
2
-

Top ICT Professional Services by Revenue

Market Cap
5.39B
10.87B
39.99B
21.9B
20.32B
1.8B
11.7B
3.23B
3.29B
7.09B

Second largest ICT in Canada

Few large competitors in
Professional Services
Second highest revenue for
ICT in Canada

Growth

12

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

10.08

Revenue in Billions

10
8
6
4
1.8

1.09
0

0.325

Procom
Consultants
Group

OnX Enterprise
Solutions Inc.

0
CGI

MDA Ltd.

Softchoice

Sources: Capital IQ, finviz.com, Branham

12

Valuation Public Company Comparables

Company Name
Cogni za nt Technol ogy Sol utions (Na s da qGS:CTSH)
Infos ys Ltd. (BSE:500209)
Ca p Gemi ni S.A. (ENXTPA:CAP)
Ta ta Cons ul tancy Servi ces Li mi ted (BSE:532540)
Atos SE (ENXTPA:ATO)
Booz Al l en Ha mi l ton Hol di ng (NYSE:BAH)
Lei dos Hol di ngs , Inc. (NYSE:LDOS)
Open Text Corpora tion (Na s da qGS:OTEX)
Wi pro Ltd. (BSE:507685)
Computer Sci ences Corpora tion (NYSE:CSC)
Mea n
Medi a n
CGI Group, Inc. (TSX:GIB.A)
Rel a tive Di s count to Mea n
Rel a tive Di s count to Medi a n

Ma rket
Cap
$32,059.5
$35,472.1
$10,736.9
$74,784.4
$8,476.8
$3,970.1
$3,190.1
$6,858.5
$20,995.8
$8,791.9

Enterpri s e
Value
$27,441.0
$30,355.0
$10,615.2
$73,016.4
$8,435.5
$5,373.8
$4,001.1
$7,672.0
$18,748.7
$9,683.9

$20,533.6
$9,764.4

$19,534.3
$10,149.6

11.1 x
10.9 x

$11,522.4

$13,338.6

(44%)
18%

(32%)
31%

EV / EBITDA
LTM 2014E
13.4 x 13.0 x
12.7 x 12.8 x
9.1 x
8.1 x
17.4 x 16.6 x
7.9 x
7.5 x
10.4 x 10.1 x
9.2 x
9.4 x
14.9 x 11.4 x
11.3 x 11.0 x
4.8 x
4.5 x

2015E
11.1 x
11.4 x
7.4 x
14.2 x
6.4 x
9.7 x
9.2 x
10.7 x
9.8 x
4.3 x

FCF
Margin %
11.30%
15.17%
5.15%
15.51%
(1.38%)
7.89%
8.03%
20.17%
9.90%
8.49%

Dividend
Yield
0.0%
1.9%
1.3%
1.1%
13.1%
3.0%
1.2%
1.5%
1.5%

10.4 x
10.5 x

9.4 x
9.7 x

10.02%
9.20%

2.7%
1.5%

17.0 x
16.3 x

15.3 x
15.3 x

2.3 x
1.8 x

2.2 x
1.8 x

9.4 x

8.4 x

8.2 x

10.09%

13.8 x

12.9 x

1.5 x

1.5 x

(15%)
(13%)

(19%)
(20%)

(13%)
(16%)

1%
10%

(19%)
(15%)

(16%)
(16%)

(34%)
(17%)

(32%)
(16%)

P/E
2014E 2015E
20.5 x 18.0 x
18.5 x 16.5 x
16.0 x 14.4 x
22.0 x 18.9 x
14.4 x 12.2 x
16.6 x 16.3 x
18.7 x 17.1 x
14.5 x 13.5 x
15.5 x 13.9 x
13.5 x 12.4 x

EV / Revenue
2014E 2015E
2.8 x
2.7 x
3.6 x
3.6 x
0.9 x
0.9 x
5.2 x
4.8 x
0.8 x
0.8 x
1.0 x
1.0 x
0.8 x
0.8 x
4.4 x
4.0 x
2.6 x
2.5 x
0.8 x
0.8 x

Commentary
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

Sources: Capital IQ

13

Catalysts
Upcoming Potential Acquisitions
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 in
2015
Been excellent at identifying, purchasing, and
integration acquisitions.
Generated free cash flow of pervious
acquisition in less than 2 years
Likely to be going after US commercial market

Revenue Breakdown

Economic Recovery
European economy ramping up and outlook is
strengthening
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 term
contracts

Sources: Capital IQ, Equity Research Reports

14

Risks
Departure of Management
-

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

Unable to find Acquisition Target

US Gov. Spending
55-60% of revenue for US
operation from US government

Plan to double size of CGI in 5-7

years

14% of total revenue

Majority of Growth from M&A

Change in government spending

could impact CGI severely

Challenge finding accretive

acquisitions

Government Gridlock

CGI could fail to meet growth

expectations

Information Loss (Hurting IT Consulting)

Forex Volatility

Company based on information and infrastructure

CGI Reports results in Canadian Dollars

Exposed to loss of Data, unauthorized access, and

destruction of data

Majority of revenues and costs are in foreign currencies

Any breach in CGI can be detrimental to CGIs

reputation

Strong Canadian dollar relative to other currencies

could negatively impact financial performance

Impacting their ability to obtain or retain clients

Sources: Equity Research Reports

15

Summary - Price Target

Analyst Price Targets

Capitalization Table

Our Target Price

$50.00

Raymond James

$49.00

Credit Suisse

$47.85

RBC Capital Markets

$47.00

Desjardins Capital Markets

$46.00

Indicative Valuation Graph

EV / Revenue 2015E

$47.93
$43.81

$70.38

$48.01
$45.76

$49.78

EV / EBITDA 2014E

$49.35

Sources: Capital IQ

$535.7
$2,690.6
$15,792.3

$67.49

$53.84

EV / EBITDA 2015E

EV / EBITDA LTM

- Cash & Equivalents

+ Total Debt
+ Pref. Equity
+ Minority Interest
= Total EV

Implied Return

$53.26

EV / Revenue 2014E

P / E 2014E

$43.85
311.0
$13,637.4

$48.00

Salman partners

P / E 2015E

Share Price
Dil. Shares O/S
Market Capitalization

$51.61

$51.70

Current Share Price

Target Share Price
Equity Upside
Dividend Yield
Suggested Return

$44.34
$50.00
12.8%
12.8%

$49.83
$53.02

16