BUSINESS

CGI expected to show further gains in Q1 from Logica acquisition, U.S. growth

01/28/2013 11:32 EST | Updated 03/30/2013 05:12 EDT
MONTREAL - CGI Group is expected to demonstrate further proof this week that its acquisition of Britain's Logica is gaining traction.

The Montreal-based IT company's adjusted earnings in the first quarter are forecast by analysts to increase by more than 15 per cent to 45 cents per share on a more than doubling of revenues to nearly $2.5 billion.

The improvement is expected even though net income is expected to drop 18 per cent to $87 million on substantially lower net margins and a drop in profits from continuing operations.

Still, CGI's (TSX:GIB.A) underlying performance should improve to reflect the acquisition and continued progress in developing its U.S. operations and momentum in the government and health-care businesses, says Paul Steep of Scotiabank.

"Ongoing macro headwinds in Europe and a slightly longer time frame to fully execute upon restructuring actions present near-term operational challenges at Logica," he wrote in a report.

"Longer term our view remains that the Logical acquisitions provides CGI with the opportunity to broaden its global footprint and delivery capabilities across a variety of dimensions."

Steep said CGI continues to secure new and existing contracts despite a "cautious" end-market environment in the U.S., Canada and Europe.

On Monday, it announced the extension of its decade-long payroll services contract with Quebec financial co-operative Desjardins Group for five years at an estimated price of $180 million.

CGI will continue to manage all of the operations for the payroll services centre dedicated to Desjardins' customers. This includes technology infrastructure, support and development of the payroll and human resources management solutions, payroll processing, and customer support.

Desjardins senior vice-president Stephane Achard said reliability of its system has made it the most widely used payroll processing service in Quebec, helping more than 17,500 businesses.

"Together with CGI, we will continue to invest in the upgrading and development of payroll and human resources management solutions in order to strengthen our leadership position in Quebec and pursue our growth across Canada," he said in a news release.

Maher Yaghi of Desjardins Capital Markets also foresees improving trends at Logica and a steady performance for CGI in North America.

In the fourth quarter, Logica added $568 million of revenues in just six weeks of being integrated with CGI, but its higher cost base contributed to a $19 million pre-tax operation loss.

He said recent results from global IT service companies such as Infosys and Indian IT services giant Tata Consultancy Services suggest optimism for the beginnings of a recovery in Europe and higher IT spending.

"Although CGI's results last quarter were below expectations, we believe management's integration plans for Logica should start to show tangible benefits over the coming quarters," Yaghi wrote on Monday.

He expects Logica's revenues will require a few quarters to stability, but the U.K. group should enable CGI or the medium and longer term to cross-sell many services given its broader global presence.

Founded in 1976, CGI is the fifth largest independent information technology and business process services firm in the world. With about 72,000 employees in North America, Europe and Asia-Pacific, CGI has some $10.4 billion in annual revenues.

On the Toronto Stock Exchange, CGI's shares gained four cents at $24.97 in morning trading.