TSX Commentary » CGI Group Inc.

DELL To Buy Perot as industry consolidates

admin — Mon, 21 Sep 2009 20:52:04 +0000

The IT services sector continues to consolidate, with another major
hardware vendor, DELL, announcing Monday an offer to buy Perot Systems
for roughly $3.9 billion – a 68% premium to Friday’s close and a valuation of
1.5x sales and 12x EBITDA (vs. CGI at 1.0x and 6.0x, respectively).
This acquisition mirrors HP’s acquisition of EDS in 2008 for an enterprise
value of $13.9 billion – a larger transaction but at a smaller premium (33%)
and valuation (0.6x sales, 5x EBITDA). The acquisition more than doubled
HP’s services business from ~$16 billion to current $34 billion.
The motivation for both acquirers (i.e., DELL and HP) was to diversify a lowmargin,
hardware-intensive business into higher value/margin IT services,
leveraging customer relationships. DELL’s latest quarterly revenues were
down 22% y/y given market conditions.
For CGI, implications are mixed. On the positive side, Perot’s acquisition
suggests that CGI could command a premium if acquired (although
management’s multi-voting shares are an impediment). The negative is that
CGI is itself looking to acquire – and this may now be more expensive.

CGI Group Inc. 09Q2 The usual Good Cash Flow, Okay Bookings, week Revenues

admin — Wed, 29 Jul 2009 23:20:40 +0000

CGI reported “typical” Q3/F09 results — strong cash flow ($136 mln., or
$0.44/share), decent bookings ($1.06 bln., or a 1.1x book-to-bill), but weak
revenues ($950 mln. vs. consensus $973 mln., flat Y/Y as reported, but
down 4.5% in constant currency). EPS were $0.25 vs. consensus $0.24.

Bookings of $1.06 bln. generated a 1.1x book-to-bill — the sixth quarter of
the last seven with a +1x bookings ratio. Canadian revenues were down
10.4% in constant currency (down 7.5% YTD), while the U.S. business
continues to be the driver, up 7.3% in FQ3, 8.6% YTD.

Cash flow remains very strong — $171 mln. operating cash flow
($0.55/share) and $136 mln. free cash flow ($0.44/share). With the cash,
CGI repurchased 3.2 mln. shares, with a further 23.6 mln. available to be
repurchased through the NCIB. Net debt now stands at $30 mln.

Overall, we see CGI as offering a resilient core business, with organic EPS
growth to come from revenue growth (supported by bookings > 1x), debt
repayments, and share buybacks. We believe acquisition(s) are also now
likely given the strong balance sheet.