Here is the article. I typed it myself. Hopefully there aren't too many mistakes.
Key merger rockets CGI into stratosphere
Montreal - Once the impending merger with competitor Bell Sygma goes through, the new CGI group will don the halo of a Canadian technology blue chip in fiscal 1999, when annual revenue is expected to surge past $1 billion.
And its shares still have big momentum based on a $6 billion plus order backlog and rising profit potential, analysts say.
The 21-year old information management group's stock (GIBa/ME) was a stellar 1997 market performer. The price multiplied about seven times, fuelled by acquisitions, rapid revenue and profit growth, and a maturing BCE Inc. link, all of which drove CGIs price-earnings multiple into the stratosphere.
Since BCE bought an 18% equity stake late in 1995, CGI's share price has exploded from the equivalent of about $0.25 to the current $26 range, adjusted for stock splits (3 in the past 9 months).
The stock began 1998 at $23.30 and jumped to $39.20 before the latest 2:1 split announced May 6.
By the May 21 effective date, it peaked at an adjusted $27 and then sailed on to $31 before falling to current levels. The split-adjusted price on Jan 2 was $11.65.
As a result, BCE, the controlling management led by chairman Serge Godin, institutions and the public have seen their shares almost triple this year alone. Shares closed yesterday at $25.65 down $1.30.
CGI now boasts a market capitalization of about $3.5 billion, based on an average weighted 120 million shares (post-split) in fiscal 1998. The float is almost 50 million, analysts estimate, and in fiscal 1999, average outstanding shares will be about 133 million.
But the new CGI will be right at the starting gate July 1, when its merger with BCE's Bell Sygma computer service unit announced in January takes effect.
Definitive agreements are already signed and the final step involving the transfer of 8.6 million CGI treasury shares to BCE in exchange for Sygma is subject to CGI shareholder approval in a special meeting June 29.
Five or six analysts who follow CGI have raised their fiscal 1998 and fiscal 1999 revenue and earnings estimates to allow for the higher-value CGI now puts on the 10-year Bell Canada's systems management and development contract that came with the merger -- $4.5 billion versus $3 billion. Together with CGI's pre-merger $1.5 billion, the total backlog is now $6 billion.
"But that's too conservative since CGI has about $2 billion of work in negotiation and could get another $2 billion in the next few years from BCE group members such as Northern Telecom Ltd., Bell Mobile Communications Inc. and Bell Canada International Inc," said Josef Vejvoda, analyst with Levesque Beaubien Geoffrion Inc. in Toronto.
Anthony Zicha, analyst with Deacon Capital Corp. in Montreal said: "CGI will now be focused heavily on the telecommunications sector as outsourcer, systems integrator and consultant.
The BCE alliance will give it a competitive advantage and it would be logical for CGI to strike a similar pact with a U.S. telecommunications company, he added.
Ralph Garcea, analyst with Scotia Capital Markets in Toronto, believes CGI is negotiating as much as $3 billion of new business, excluding the BCE connection.
He says CGI is a strong buy and along with Zicha and Vejvoda has a one-year target price of about $40. This is partly based on surging revenue per share and comparisons with the stock price ratios of U.S. firms.
Alex Baluta, analyst with Midland Walwyn Inc. in Toronto, rates the stock "accumulate: and along with several others is revising his CGI model and price target.
CGI has developed a solid computer services operation, but lacked financial muscle to exploit ballooning growth in outsourcing when it signed a strategic alliance with BCE and subsidiary Bell Canada in late 1995. BCE reportedly unhappy with Sygma, prompting it take an equity interest in CGI.
But CGI's share price really surged in 1997, reflecting two key acquisitions in the banking and insurance service sectors and completion of its national infrastructure.
With the merger with Bell Sygma completed June 30, the new CGI will become the biggest Canadian-owned computer services group and sixth largest in North America.
Under the BCE deal, CGI manages Bell Canada's information systems development and maintenance and becomes an international telecom sector player. CGI and Bell Canada will bid jointly on many big outsourcing and systems integration projects.
It is almost doubling its complement to 7,500 professionals, will have a revenue run rate of $1.1 billion and handle 2,000 clients in North America and overseas. Godin and his team stay at the helm for at least six more years.
In turn, BCE attains its goal of getting an efficient computer services group able to operate in a global market growing at annual 20% for years ahead and 80% reliant on more stable outsourcing revenue and only 10% on Millennium 2000 business.
BCE will have 42% equity stake and 17.8% voting interest, up from the previous 23%.
It's formidable president Jean Monty will join the board along with Bell Canada president John MacDonald and BCI president Louis Tanguay.
By 2004, BCE will have a 56% equity stake as the management group reduces its holdings. The multiple voting shares will finally become single voting shares.
CGI's recent story has been dramatically shown by the basic numbers.
For fiscal 1997 ended Sept. 30, revenue rose 90% from previous year to $232 million and net income 186% to $7.8 million.
In the first half of fiscal 1998, revenue was up 192% to $259 million and net income rose 343% to $11 million. But analyst say these numbers are no relevant because the new enlarged CGI is almost born.
The estimate the new company's fiscal 1998 revenue between $700 and $715 million and per-share earnings of 25 to 32 cents (post split May 21). In fiscal 1999, with full benefit of Bell Sygma, revenue will be $1.3 billion to $1.5 billion and net income 54 to 65 cents a share (average 133 million shares outstanding). Garcea looks to fiscal 2000, when earnings per share should reach almost $1.
Margins will remain good partly because the Bell business is at guaranteed commercial rates, analysts agree, and CGI's P/E multiple will gradually stabilize in the 30 to 40 times range, in line with comparable U.S. stocks.
CGI traditionally never considered paying a dividend because it has to plow back all its profits into development.
"This won't change yet, but investors buy the stock for revenue per share growth, rising profit and share price performance," says one analyst.
"The heavy goodwill doesn't faze them at this stage."
Scotia Capital Market's Garcea said: "Besides the BCE group potential, more consolidation in financial services will open up new outsourcing opportunities for CGI, especially in the cross-selling of retail banking services to insurance clients."
Analysts agree CGI stock is a medium risk. The big factors are:
A general correction in North American information technology stocks or a major stock market break, people or technological problems in integrating Bell Sygma or a severe shortage of trained professionals.
"Integration is a big job, but Bell Sygma went through the wringer last year and the merger should go smoothly with CGI's management and incentive systems," says Vejvoda.
"There's a good entrepreneurial team at the top which can call on BCE's experience any time. But in the end, technology and strong management of growth hold the keys."
Tom... |
