CGI Group Pitch (GIB.

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

BComm, 2017

BA, Economics, 2015

Ziyi Jin BA, Economics, 2016

Matas Sriubikis
January 13, 2014

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

Management
Team

Investment
Thesis Point #1

Investment
Investment
Investment
Thesis Point
Thesis Point
Thesis Point
#2
#3
#4
Projected
Associated
Price Target
Catalysts
Risks
Summary

Company
Valuation
Appendix

Sector Overview
S&P 500 Sector Indices - Information Technology Sector
710
690
670
650
630
610
590
570
550

Industry
Positive
Growth

S&P 500 Sector Indices - Telecommunication Services Sector

170
165
160
155
150
145

Stagnant
Growth

140

Sources: Capital IQ

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

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

3,400
3,200
3,000

Similar LTM Growth by Less Volatility (than

above graph) -> Indication of Better Opportunities
Measured on a Risk-Return Basis

2,800
2,600
2,400
2,200

Sources: Capital IQ

Company Overview
CGI Group Business Description

Price Volume Performance

Provides information technology (IT) and

business process services. It offers a range of IT
and management consulting services
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.

46

5M

44

4M
4M

42

3M

40

3M

38

2M

36

2M

34

1M

32

1M

30

Volume

Price

Financial Metrics (CDN, MM)

Total Revenue
EBITDA
EBIT
Net Income
Capital
Expenditure

10,499.7 Market Capitalization

1,678.0 Total Enterprise
Value
1,364.0 Cash & ST Invst.
859.4 Total Debt
(181.5) Total Assets

13,611.4 TEV/Total Revenue

15,766.2 TEV/EBITDA
535.7 P/Diluted EPS Before
Extra
2,690.6 Price/Tang BV
11,234.1 Total Debt/EBITDA

1.5x
9.4x
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
5
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
Appointed in
2006

Francois Boulanger,
CFO

Eva Maglis, CIO

Prior was
President and
COO since
2002

From 2006 to
2004, he was
SVP and
Corporate
Controller

Leads team of
CIOs and CTOs
which deliver
enterprise wide
IS/IT services
and solutions to
CGI

Was president
and CEO of
Bell Sygma a
Bell Canada
subsidy

Joined CGI in
1998 as Director
of Project
Accounting

Prior worked in
CGIs global
infrastructure
group

Serge Godin,
Chairman/Founder
Founded CGI in
1976 at age of
26

Lead until 2006

Grew from 2
employees to
68,000

Since Oct 2014

Past strong
experience

Claude Seguin SVP

Corp Dev
With CGI since

Inducted into
Canadian
Business Hall of
Fame in 2008

Sources: Capital IQ, CGI Company Website

Jame
CMO

More than 30
years of
experience
Cofran,
SVP &

Appointed in
2012

Prior was global

marketing lead
for the financial
services industry
at CGI since 2009

Worked in
management at
American
Management
Systems

2003

SVP of corporate
development and
strategic
investments

Prior was
president of CDP
capital (a private
equity firm)

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
CEO sets eyes on doubling size of CGI

IV: Brand Positioning & Market

Dominance
Few competitors in this space

within 5-7 years

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

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

Positive Outlook
Predicted generation of $1.17B in free
cash flow in FY16 compared to $842M
in FY14
Drivers include:

2014

2015E

2016E

Decline in Spending

2.5 years since acquisition of Logica

and CGI is beginning to normalize
Integration of Logica completed
one year ahead of schedule
Margin expansion
Decline in integration spending
Prudent working capital management
Management invested $576m ($51m
Reduced Logica (subsidy) integration
more than target) to yield access of
payments
$400m in annual savings (up from
Perceived growth in Logica
Logica is multinational IT and
$375m) from integration of Logica
management consultancy company
France, Netherlands, and Belgium
headquartered in the UK which is a
still waiting on showing improved
wholly owned subsidy of CGI Group
performance due to local labour
regulations
9
Sources: Capital IQ, Barclays Research, Equity Research Reports,

Argument II: Increasing EBIT Margins

EBIT Margin Improvements

Run-Off of Low Margin Contracts

Contracts expiring in Europe
Continuation of optimizing its
operations and improving utilization in
some markets

Exit from Unprofitable, SubScale

Countries
Leaving
unprofitable countries

Looking to focus more so on higher

margins in increased mix of
software/IP revenue
Recent restructuring in Finland
Looking to globalize existing
New low cost delivery centers
software/IP (intellectual property)
Seeing more opportunities available in
Customizing projects for multiple
Europe
clients
10
Sources: Capital IQ, Barclays Research, Equity Research Reports, RBC Capital

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,

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. midteens
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

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

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

Top ICT Professional Services by

Revenue12 10.08

Revenue in Billions

10
8
6
4
2
0

1.8

1.09

Sources: Capital IQ, finviz.com, Branham

0.33
0

Second largest ICT in Canada

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

Growth
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

12

Valuation Public Company Comparables

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

US Gov. Spending
55-60% of revenue for US
operation from US
government
14% of total revenue

Turnover of key
employees due to lack of
effective management

Change in government
spending could impact CGI
severely

Highly complex projects

with stringent
requirements and tight
deadlines

Government Gridlock

Information Loss (Hurting IT

Consulting)
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
CGIs reputation

Unable to find
Acquisition Target

Plan to double size of CGI in

5-7 years
Majority of Growth from M&A
Challenge finding accretive
acquisitions
CGI could fail to meet
growth expectations

Forex Volatility
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

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

$48.00

Salman partners

$46.00

Indicative Valuation Graph

EV / Revenue 2015E

$53.26

EV / Revenue 2014E

$47.93
$43.81

$70.38

$48.01

$45.76

$49.78

EV / EBITDA 2014E

$49.35

Sources: Capital IQ

$67.49

$53.84

EV / EBITDA 2015E

EV / EBITDA LTM

$13,637.4

- Cash & Equivalents

$535.7
+ Total Debt
$2,690.6
+ Pref. Equity
+ Minority Interest
= TotalReturn
EV
$15,792.3
Implied

$47.00

Desjardins Capital Markets

P / E 2014E

$43.85
311.0

$47.85

RBC Capital Markets

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