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Technology Stocks : Y2K (Year 2000) Stocks: An Investment Discussion -- Ignore unavailable to you. Want to Upgrade?

To: BM who wrote (9168)	1/25/1998 10:33:00 AM
From: BM	Respond to of 13949

Analyst report on Cognicase in January 16 issue of Investor's Digest From a recent report by [HSBC James Capel] analyst Pierre Boucher and associate Antonello Grascia. We recommend the shares of Cognicase Inc. (COG-TSE, $17.50, phone 514-866-6161) as a buy based on our 12-month target of price of US$15. [Note - Cognicase also trades in the US under ticker COGIF] Cognicase is well positioned to take advantage of the opportunities related to the Year 2000 (Y2K) computer problem. For more than 20 years, computer programmers have written applications with "date fields" of only two digits (eg. 97 for 1997). For computers to recognize the change to the 21st century, billions of lines of source code may need to be changed or computers will interpret the year 2000 to be 1900. $300B to $600B cost The implication for non-converted applications can be dramatic. For example, KLM is considering halting some flights on January 1, 2000, due to the risk of potential systems failures. Global estimates to fix the Y2K problem are between US$300 and US$600 billion. About 10 percent of this cost range is attributable to the conversion process itself, which is Cognicase's main market segment. The company was incorporated in 1991 and completed its first Year 2000 computer conversion in 1994. In October, it raised gross proceeds of US$44.3 million in a cross-border initial public offering. Cognicase and its partners have more than 35 conversion projects with clients such as 3M, Bell Canada, and Nortel. As well, Cognicase has performed more than 100 assessments, the precursor to conversion projects. Cognicase's automated software tools, consulting services, alliances and software maintenance services should provide a relatively smooth transition after 2000. A few weeks ago, Cognicase and Oerlikon Aerospace announced they had obtained two contracts with Canada's Defense Department worth $50 million over the next four years. Cognicase's share of this contract is $20 million. Ottawa may have to spend more than $1.5 billion to fix the Y2K problem. Most government departments are in the assessment and planning mode now. The company recently acquired Montrealbased IcoTech, and is considering other acquisitions. IcoTech, which provides consulting and systems integration services, has revenues of US$16.2 million. Its customer list includes Hydro-Quebec, Provigo, Canadian National Railway, the Defense Department and France Telecom. IcoTech's presence in France will open the door to the conversion projects foreseen with the move to a single currency (i.e. Euro) in the European Community. Another large growth opportunity is the migration from a Unix operating system to Windows NT. Through seven conversion factories, Cognicase derives royalties for the use of its conversion software, COGNI-2000. The factories are operated by its strategic partners, DMR Group, MCI System house and Trecom Business Systems in Australia, Canada, France, Germany, the U.K. and U.S. During fiscal 1997, royalties from these seven conversion factories accounted for about 12 per cent of total revenues. Growth to peak in 2000 In a relatively short period of time, Cognicase will have to manage exceptional growth followed by a possible downsizing phase. After 2000, its growth rate will fall to more normal levels of between 25 and 30 per cent. Publicly listed companies closely associated with the Y2K problem have been relatively volatile. Since going public three months ago, Cognicase's stock has traded between $7.50 and $14.75. Another risk investors should be aware of is that a large percentage of contracts for Y2K projects are fixed-price. While the company has been able to manage this type of contract relatively well so far, the risk of cost overruns remains. FINANCIAL STATISTICS AND KEY RATIOS 1996 1997 1998E 1999E Revenue (US$M) 4.525 6.563 30.58 56.38 Net earnings (US$M) 0.5 0.697 5.043 9.189 Earns./share (US$) 0.09 0.10 0.39 0.71 Shares o/s (M) 5.46 6.05 12.83 13.0 [apologies for table formatting - I can't make both text and tables format correctly in the same post - suggestions welcomed] Musings CGI Group will be taking over Bell Sygma as a subsidiary in a few months. Bell Sygma owns a minority stake in Cognicase. CGI Group has used Cognicase as a tool in the past (as early as 1994) for Y2K work but has an alliance currently with Informission (private firm) for at least some of its Y2K work. Will this upcoming takeover of Bell Sygma mean more use by CGI of the Cognicase tool? Will CGI now be funnelling any excess Y2K demand by sub-contracting to Cognicase? Interesting.