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. The company operates with clients through a local relationship model complemented by a global delivery network that helps clients digitally transform their organizations and accelerate results.

Key Highlights:

• Recently the group announced that it has been selected by the Government National Mortgage Association within the U.S. Department of Housing and Urban Development to enable the agency's Digital Asset Management Solution through a blanket purchase agreement encompassing one base year and four option years.
• On September 10, 2020, the Company entered into a partnership with Mobi724 Global Solutions Inc., wherein the later would provide processing platform solutions as part of a custom development initiative commissioned from CGI and the Project is expected to be completed within 24 months.
• Recently, the company has signed a six-year extension to its existing contract with the City of Edinburgh Council, wherein the company would provide end-to-end managed IT services to the local authority until 2029.

Q3FY20 Financial Highlights:  CGI Inc. declared its quarterly results wherein the company’s reported revenue of CAD 3,052.7 million, reflecting a decline of 2.2% on y-o-y basis. The decrease was mainly attributable to the slowdown of activities, primarily due to COVID-19, slightly offset by recent business acquisitions. Total operating expenses stood at CAD 2,695.03 million as compared CAD 2,702.10 million in the previous corresponding period (pcp) due to a declining cost of services, selling and administrative, acquisition-related and integration costs, which was partially offset by a higher net finance costs and inclusion of restructuring costs amounting to CAD 39.54 million. Adjusted EBIT stood lower at CAD 448 million, as compared CAD 474.2 million in pcp, while EBIT margin fell to 14.7% from 15.2% Q2FY19. Net earnings were reported at CAD 260.9 million as compared to CAD 309.4 million in pcp. The company reported a stable backlog of CAD 22.30 billion, slightly lower than CAD 22.4 billion in pcp.

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: Price to Earnings Based (Illustrative)

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

Stock Recommendation: The stock of GIB.A corrected ~18% so far this year. However, amidst the current downturn, the company has able to report stable ROE and ROCE ratios of 17.3% and 13%. New contract wins along with the extension of existing contracts augurs well for improved business prospects for the company. The company has deep-expertise across several IT-based services and offers several value-added new-generation services, which is essential for new aged businesses in order to stay competitive in the industry. The company has an outstanding track record of on-time, within-budget delivery aided from the commitment to excellence philosophy and its robust governance model. 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. U.S 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) on (Next Twelve Months) NTM basis. Hence, we recommend a ‘Buy’ rating on the stock at the closing market price of CAD 89.38 on September 17, 2020.

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

George Weston Limited

George Weston Limited (TSX: WN) is a Canada based company which operates through three segments like retail, real estate, and consumer goods. The company caters to the retail segment through one of the subsidiaries named Loblaw, one of the largest grocers in Canada while the company operates through open-ended real estate investment trust through Choice Properties. The third subsidiary of the Company is Weston Foods, which operates in the bakery across North America.

Q2FY20 Financial Highlights: WN declared its quarterly results, wherein the company posted revenue of CAD 12,357 million, reflecting a growth of 6.5% on y-o-y basis. The growth was underpinned 7.4% growth from the Loblaw (a subsidiary of the group), which was primarily driven by retail sales, partially offset by a decrease in financial services revenue. The increase was primarily due to positive same-store sales growth combined with higher retail square footage. Food retail same-store sales grew 10% during the quarter, which was positively impacted by COVID-19. Operating Income plunged 47.9% y-o-y to CAD 401 million, primarily attributable to higher cost of inventories sold combined with a surge in the selling, general and administrative expenses. The Company’s Adjusted EBITDA stood significantly lower at CAD 1,087 million, against CAD 1,313 million in pcp, due to a decline from Loblaw retail and financial services and an increase in the input costs within the retail segment. Loss Before Income Taxes stood at CAD 120 million against an income of CAD 462 million in pcp. The company posted net Loss of CAD 172 million as compared to a net income of CAD 353 million in pcp.

Q2FY20 Income Statement Highlights (Source: Company Reports)

Risks: The real-estate sector might witness a major setback due to the closures of production facilities, a decline in the rent payment ability of the tenants, lower consumer demand for tenants’ product or services, temporary or long-term stoppage of development projects etc. Further, an increase in the operating costs due to higher hygiene and sanity expenditures and in-store security, etc., on account of COVID-19 pandemic might weigh on the margins.

Valuation Methodology: Price to Earnings Based Relative Valuation (Illustrative)

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

Stock Recommendation: Due to negative investors' sentiment, the WN stock slide ~13% in the last one year. However, on a year-to-date basis, the retail business delivered impressive growth within the drug and food segment, which is impressive. The company reported strong growth in the same-store sales, driven by improved traction from the food retail segment coupled with an increase in the Food retail basket size, which is a key positive. The company's Choice Properties is a leading brand within its segment. To support its tenants, Choice Properties agreed to assist qualifying small businesses and independent tenants who requested rent relief with rent deferrals for 60 days and is having discussions with its larger tenants on a case-by-case basis to determine rent payment solutions. We believe, above assistance is likely to enhance the relationship with its existing clients and would support the long-term growth. On the gradual re-opening of the foodservice segments and other non-essential businesses, we expect a gradual surge in the overall consumer demand, which is likely to support the company's long-term business prospects. The company has a strong balance sheet along with ample liquidity of ~CAD 4.6 billion, which seems to be sufficient to weather the current challenging environment. We have valued the stock using the P/Earnings multiple based illustrative relative valuation method and have arrived at a target upside of double-digit (In percentage terms). We have industry (Consumers non-cyclicals) median on NTM (next-twelve-months) basis for the purpose. Considering the current trading levels, and aforesaid facts, we recommend a 'Buy' rating on the stock at the closing market price of CAD 95.81 on 17 September 2020

WN Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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