CGI Inc. revisited: Global Tech Compounder for a Digital Age

In it’s 2021 technology industry outlook, Deloitte identified three critical issues in a post-COVID world. The first of these applies to all sectors and services: digital transformation. “Facing new pressures and constraints, companies are working to improve their agility and flexibility, increase automation, and move to more real-time operations. Accelerating digital transformation efforts will likely take a rededication to improving cloud infrastructure, data and analytics capabilities, and cybersecurity. It will also likely require a renewed focus on business model transformation and ecosystem development. Growth opportunities abound for tech companies that execute on all forms of digital transformation, particularly in the areas of cloud, XaaS, analytics, RPA, AI, cybersecurity, and edge computing.”

This is the core of CGI’s business model.

CGI Inc, also known as CGI Group Inc, is among the largest independent IT and business consulting services firms in the world. They deliver end-to-end managed services from strategic IT and business consulting to systems integration, managed IT and business process services including SaaS, cloud and cybersecurity, alongside intellectual property solutions for government and corporate clients. CGI works with clients through a local relationship model complemented by a global delivery network that helps clients digitally transform their organizations and accelerate results.  They recorded $12B in revenue in 2020 with a market cap of $27B.

The focus on digital transformation was the highlight of their recent Q2F21 earnings, where CGI reported their highest quarterly bookings since 2015, with TTM bookings at a record high. The company posted 126% book-to-bill for Q2 (of which 40% was new business, above historical average) and 113% TTM — these make up part of the $23B backlog of services. Book-to-bill is an important leading indicator which signals positive organic growth after a decline during COVID.

Management was clear on the Q2 conference call: they’re seeing an accelerated and structural shift to digitization across every geography and service, including health and education, which is driving new bookings and a return to positive organic growth in Q3. A rapid shit to digitization is being driven by the cloud. The Deloitte report notes: “Interestingly, digital transformation and the cloud are synergistic: The cloud enables digital transformation, and digital transformation fuels the importance of moving to the cloud.” George Schindler, CGI’s CEO, made note of this on the Q2 conference call:

Since 2001, CGI has seen revenues compound at an annual growth rate (CAGR) of 13.4%, and a Free Cash Flow 22.7% CAGR. 2020 FCF was $1.6B and 2021 estimates are ~$1.8B.

In the same timeframe, CGI has ROIC of 16.2% CAGR, alongside net profit margins of 11.3% CAGR.

With numbers like those over twenty years, you better believe the chart looks just as good: consistent uptrend from bottom left to top right, with an EBITDA CAGR of 12.54%. CGI has converted 57% of adj. EBITDA into FCF over the last five years. The company is capital light and could see further reductions to CapEx with the permanence of WFH policies and less office space and business travel — although management is eager to get back to face to face meetings as it is truly the only way to build and foster a corporate culture, especially in terms of relationship building and earning new contracts and renewals.

The current FCF Yield stands at 6.3% . Revenue growth is estimated to be 3.4% in FY22. These estimates may be conservative if book-to-bill % is maintained or trends higher, which is management’s expectation, so there is room for upside here compared to analyst estimates of -6% booking YoY in 2022.

As a growth by acquisition story, management indicated that valuations are more attractive now and therefore M&A is another near-term catalyst: they recently acquired Austin-based Sense Corp for an estimated $66mm. They also reiterated their target to achieve double-digit annual EPS growth and double the company’s size in 5–7 years through its build-and-buy model. Analysts have been expecting a large “transformative” acquisition for a little while (the last one being Logica in 2012). Big or small, either way it shouldn’t be a problem: CGI averaged 13% EPS growth annually since 2010 (29.4% CAGR) and is a disciplined capital allocator.

The reinvestment runway and secular growth story remains robust and accelerating thanks to COVID. There moat here is narrow and the IT business is sticky. CGI contracts are typically in the 5-10 year range (see: 10-year renewal with Canadian aviation training company CAE Inc / wildfire mapping with the European Space Agency / evolve IT infrastructure for the Bavarian State Ministry of Justice). These contracts provide ample visibility and secure recurring revenue streams. The global software consulting market is also expected to reach $427B by growing at a CAGR exceeding +11% from 2021 to 2027. This is one of my core, slow and steady tech holdings and a company to consider adding to your never sell portfolio. It is also one of the top annualized return large cap stocks of the past decade.