CGI Inc.

CGI Inc. (TSX: GIB.A) is an independent IT and business consulting firm which delivers an end-to-end portfolio of capabilities. The Group offers strategic IT and business consulting, business process services and intellectual property solutions.

Key Highlights:

• CGI received an indefinite-delivery or indefinite-quantity contract from the U.S Department of Justice (DOJ) to provide Mail and General Support Services with a contract value of ~CAD 400 million. The company would provide a broad set of shared services to the offices, boards, divisions and bureaus within the DOJ and across other federal agencies. 
• CGI collaborated with Fennia Mutual Insurance Company, wherein it will manage Fennia's application development and maintenance services. Furthermore, the Company would also give support to the Fennia's end-users and operating environments.

Q3FY20 Financial Highlights:  CGI Inc. announced its quarterly results, wherein the company reported a stable top-line, underpinned by improved revenues from U.S. Federal and U.S. Commercial and State Government, while slowdown across the Western and Southern Europe and Canada remained a drag. Revenue, during the quarter, stood at CAD 3,052.7 million, declined marginally from CAD 3,119.797 million in the previous corresponding period (pcp). Total operating expenses stood at CAD 2,695.032 million, lower than CAD 2,702.101 million in Q3FY19, primarily attributable to a lower cost of services, lower selling and administrative costs and lower acquisition-related and integration costs, partially offset by the inclusion of restructuring costs amounting to CAD 39.54 million and significantly higher net finance costs. Adjusted EBIT stood lower at CAD 448.031 million, down 6% from pcp, while the margin dropped to 14.7% from 15.2% Q3FY19. Net earnings stood at CAD 260.907 million, against CAD 309.363 million in Q3FY19.

Q3FY20 Income Statement Highlights (Source: Company Reports)

Risks: The Company provides technology and IT services to several business and corporates. A prolonged lockdown scenario may impact the backlog and order-book of the group.

Valuation Methodology: P/E Based (Illustrative)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The stock of GIB.A fell ~16% so far this year, on account of soft economic scenario due to COVID19 pandemic. Despite an overall slowdown in the economy, the company, at the end of the quarter reported a backlog at CAD 22.295 billion, which is impressive. A backlog is an indicator of future revenues. The company added orders from the US governments and state agencies, which indicates business resiliency. Furthermore, the company is constantly adding premium clients to its portfolio, which is a key positive. The group has a stable backlog of 2.8 billion and represent 1.8x of annual revenue, which provides revenue visibility. The company’s book to bill ratio stood at 93.1%, which is decent. The US federal government is one of the key customers of the group and contributed ~14% to the group’s revenue, which is a key positive from a stable revenue point of view. We have valued the stock using Price to Earnings based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered industry (Software & IT Services) median on NTM basis. Hence, considering the aforesaid facts, current price movements, we recommend a ‘Buy’ rating on the stock at the closing market price of CAD 91.01 on October 16, 2020.

GIB.A Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Imperial Oil Limited

Imperial Oil Limited (TSX: IMO) is an integrated oil company. The company is engaged in all the phases of the petroleum industry in Canada, including exploration for, and production and sale of, crude oil and natural gas.

Investment Rationale:

• Strong balance sheet, with total long-term debt to Total Capital ratio stood at 17.3%, significantly lower than the industry median of 36.9%.
• The company has decent liquidity position, with the current ratio stood at 1.35x, whereas the average peer’s current ratio stood at 1.15x. During the second quarter of 2020, the company entered into two additional committed short-term lines of credit totalling to CAD 800 million to supplement its existing lines of credit of CAD 500 million.
• An income play with a track record of consistent dividend payment. At the last traded price, its shares were yielding 5.38%, which is lucrative given the lower interest rate environment.
• Risk Associate to Investment: The company is exposed to the volatility in the crude oil and natural gas prices, and an extended demand slump for oil would weigh on the group’s financial health.

Q2FY20: Financial Highlights

• The company recorded a net loss of CAD 526 million or CAD 0.72 per share on a diluted basis in the second quarter of 2020, compared to net income of CAD 1,212 million or CAD 1.57 per share in the same period of 2019.
• The upstream segment recorded a net loss of CAD 444 million in the second quarter of 2020.
• Imperial’s average Canadian dollar realizations for bitumen decreased in the quarter, primarily due to a decrease in WCS. Bitumen realizations averaged CAD 12.82 per barrel in the second quarter of 2020.
• The downstream segment recorded a net loss of CAD 32 million in the second quarter of 2020, compared to net income of CAD 258 million in the same period of 2019
• Capacity utilization was 66 per cent, compared to 81 per cent in the second quarter of 2019.
• Petroleum product sales were 357,000 barrels per day, compared to 477,000 barrels per day in the second quarter of 2019.
• The chemical segment recorded a net income of CAD 7 million in the second quarter, compared to CAD 38 million from the same quarter of 2019. 

Valuation Methodology (Illustrative): Price to Sales

*Note: All forecasted figures have been taken from Refinitiv (Thomson Reuters)

Stock Recommendation: The company’s strong capital structure and the complementary nature of the Upstream, Downstream and Chemical businesses reduce the company’s enterprise-wide risk from changes in commodity prices and currency exchange rates. Further, the group is offering a decent dividend yield, which is encouraging from an income investor’s point of view. Based on the above rationale and valuation, we have given a “Buy” recommendation at the closing price of CAD 16.36 (as on October 16, 2020, after the market close).

1-Year Price Chart (as on October 16, 2020, after the market close). Source: Refinitiv (Thomson Reuters)

Disclaimer

The advice given by Kalkine Canada Advisory Services Inc. and provided on this website is general information only and it does not take into account your investment objectives, financial situation and the particular needs of any particular person. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. The website www.kalkine.ca is published by Kalkine Canada Advisory Services Inc. The link to our Terms & Conditions has been provided please go through them. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations later.