CGI Has an Embedded Competitive Position in North American and European Government Agencies

Business Strategy & Outlook

CGI is a leading global IT services firm, catering a bit more to governmental agencies than its peers, while providing managed IT, consulting, and IP solutions. The CGI benefits from strong switching costs and intangible assets, the combination of which leads to assign the firm a narrow economic moat rating. Despite the economic headwinds brought on by COVID-19, CGI has posted steady revenues due to its long-term contracts with many of its clients, and such stability will continue with the help of a stable trend for both CGI’s switching costs and intangible assets, which both work to create stickiness amongst existing customers. CGI has long operated differently from many of its peers, focusing more on a proximity-based operating model that places CGI offices near its clients. While the firm’s offshore leverage is lower than many of its peers, it still provides global delivery centers. Nonetheless, the proximity model is important for the firm’s government vertical as governments often require data to remain within their sovereign borders to better ensure data security. There are trade-offs to CGI’s government focus. On one hand, it creates even greater stickiness as The government vertical has marginally stronger switching costs than enterprises. Yet, CGI’s growth potential is more limited than its peers due to the greater resources the enterprises have to invest in themselves. On top of the switching costs, CGI also possesses intangible assets in the form of expertise the company has and continues to acquire. With an eye on the future, the CGI to benefit from vendor consolidation through its ‘build and buy’ strategy as it continues to acquire smaller IT firms, with their own niche expertise, to gain access to localized markets across the globe.

Financial Strengths

The CGI’s financial health is in good shape. CGI had CAD 1.7 billion in cash and equivalents at the end of fiscal 2021, with debt of around CAD 3.6 billion. This leveraged position, especially in comparison with its Indian IT Services counterparts which tend to have low debt levels, is a result of CGI’s more recent European acquisitions that have been funded, in part, by debt. Whereas a net debt to net capital ratio of 21% may appear to be high within this industry, the firm’s ability to generate free cash flow over a billion dollars on an annual basis should enable it to pay down its debt without the debt posing any material risk to the firm’s operations. The firm also has access to an unsecured committed $1.5 billion credit revolver set to expire in December 2024.

Bulls Say

CGI has an outsize presence in the government vertical, which could lead to further growth if government agencies place increasing importance on total investment in IT needs.
Increased vendor consolidation could allow bigger IT services players such as CGI to expand their client base at the cost of smaller, more local players
CGI’s recent European acquisitions may benefit the firm in making inroads into the European market, resulting in material margin expansion.

Company Description

CGI Inc. is a Canada-based IT-services provider with an embedded position in North America and Europe. The company generates more than CAD 12 billion in annual revenue, employs over 88,000 personnel, and operates across 400 offices in 40 countries. CGI offers a broad portfolio of services such as consulting, systems integration, application maintenance, and business process services, or BPS. The company’s largest vertical market is government, which contributes more than a third of group revenue.

(Source: Morningstar)

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