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.

Recent Announcement:

On November 04, 2020, the corporation announced that it had been selected by VIA Rail Canada to assist national passenger rail service for enhancing its customer experience. The group will provide assistance to VIA Rail for implementing an innovative reservation system which is likely to improve passenger’s travelling experience.

Key Highlights:

• Strong Operating Metrics: The company has delivered decent growth in its Adjusted EBIT and Adjusted EBIT margin during FY15 to FY20, reflecting business resiliency which further ensured strong cash flow generations. Bill-to-book is one of the leading indicators for determining cash flow levels, and the group maintained it at 118.8% during the fourth quarter of FY20, the highest in the last eight quarters.               

Historical Trends (Source: Company Presentation)

• Improved Client traction: Despite a slowdown in the overall economy, the group witnessed improved traction from its existing and new clients resulting in higher bookings. This resulted in a superior cash generation. The company reported an impressive backlog of CAD 22.67 billion, representing 1.9x of the annual revenue. Furthermore, the company has derived ~25% of its revenue from new business, which is a key positive. We believe the increased usage of technology as most of the businesses would be dependent on Information Technology for attaining their goals would drive the demand for the company’s offerings.

FY20 Financial Highlights:

• The group posted a 0.4% y-o-y growth in revenue at CAD 12,164.1 million in FY20.
• The company reported Adjusted EBIT of CAD 1,863 million, up 2.1% from FY19, reflecting an adjusted EBIT margin of 15.3%, as compared to 15.1% in the previous corresponding period (pcp).
• Net earnings dipped to CAD 1,117.9 million, from CAD 1,263.2 million in pcp. The decline was due to one-time restructuring costs amounting CAD 155.4 million.

FY20 Financial Metrics (Source: Company Presentations)

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 company has more than 3,250 transport and logistics experts across the globe and has more than 200 clients within the aviation, rail, maritime, road and regional and logistics segments, which represents global as well as the regional presence. Furthermore, the company is well poised to continue creating value for its clients with increasing dependency on technology to traverse these challenging times.

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 (Technology) 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 88.8 on November 12, 2020.

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

Morguard Corp

Morguard Corp (TSX: MRC) is a real estate company that acquires, owns, and develops commercial, multi-unit residential and hotel real estate properties in Canada and the United States.

Key highlights

• Improved rental collection:Rent collections from all asset classes improved significantly with 92.2% collected during the third quarter of 2020, compared to an 86.1% collection rate for the second quarter of 2020.

Source: Company

• Started operating hotels again:The most significant percentage drop in revenues was recorded from the hotel's segment due to the closures and low occupancy.  At present, out of the Company's 38 hotels, 35 are open and operational at reduced occupancy levels because of government health guidelines. Commencement of the hotels would provide support the top line going forward.

• Liquidity:The Company has liquidity of approximately CAD 688 million, which consist of CAD 230 million in cash and CAD 458 million under its revolving credit facilities. Besides, the Company has approximately CAD 852 million of tangential income-producing and hotel properties which could be financed. To further enhance the liquidity, the company has narrowed down the scope of its capital expenditure program to ensure the availability of resources.

• Dividend: The company has announced the fourth quarter dividend of CAD 0.15 per common share to be paid on December 31, 2020, to the shareholder on record date of December 15, 2020.

Financial overview of Q3 2020

Source: Company

• In Q3 2020, total Revenue posted by the company decreased by CAD 48 million, or 16% to CAD 251 million, as against CAD 299 million in Q3 2019.

• Total Revenue from real estate properties increased by CAD 1.4 million, or 0.7% to CAD 216.7 million in Q3 2020, compared to CAD 215.3 million in the same quarter of the previous financial year.
• Total Revenue from hotel properties decreased by CAD 43.7 million, or 66.8% to CAD 21.8 million in Q3 2020, compared to CAD 65.5 million in the same quarter of the previous financial year.

• Net operating income posted by the company in Q3 2020, decreased by CAD 19.8 million, or 13.2%, to CAD 130.3, compared to CAD 150.1 million in Q3 2019, primarily due to lower revenue from the hotel portfolio due to closures and reduced occupancies and higher bad debt expense.

• In Q3 2020, the company’s reported Net loss, increased by CAD 35.3 million to CAD 37.6 million, compared to CAD 2.3 million for the same period in 2019, primarily due to an increase in net fair value loss of CAD 72.2 million and a decrease in NOI of CAD 19.8 million, partially offset by a decline in equity loss from investments of CAD 25.8 million, a reduction in provision for impairment of CAD 11.5 million and an increase in deferred income tax recovery of CAD 11.8 million.

Risk associated with investments

The company is exposed to a lower occupancy rate risks in the hotels and a next wave of virus outbreak could weigh on the group’s performance. 

Valuation Methodology (Illustrative): EV to EBITDA

All forecasted figures and peers have been taken from Thomson Reuters 

Stock recommendation

The economic slowdown resulting from the pandemic has impacted the commercial real estate sector hard. Canada's economic recovery is expected in the second half of 2020 as local governments took a phased approach to reopen with caution. Despite the challenging operating environment, rent collections from all asset classes have been substantial, with 92.2% collected during the third quarter of 2020, compared to an 86.1% collection rate for the second quarter of 2020. In the Retail segment, all of the company's enclosed malls are now open, and the vast majority of tenants are allowed to operate, which is a key positive. With the gradual reopening of shops and other commercial spaces, we expect an improved scenario for the second part of FY20. Therefore, based on the above rationales and valuation, we have given a 'Buy' rating at the closing price of CAD 106.66 on November 12, 2020 with a lower double-digit upside (in percentage terms) potential. We have considered SmartCentres Real Estate Investment Trust, and H&R Real Estate Investment Trust etc. as the peer group for the comparison.

1-Year Price Chart (as on November 13, 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.