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10 July 2014

Americas/Canada
Equity Research
Software & Services

CGI Group (GIBa.TO)


Rating OUTPERFORM*
Price (09 Jul 14, C$) 38.02 INITIATION
Target price (C$) 48.00¹
52-week price range 40.72 - 29.76
Market cap. (C$ m) 10,551.46 Build and Buy Strategy is Building Value
Enterprise value (C$ m) 12,732.49
*Stock ratings are relative to the coverage universe in each ■ Event: We are initiating coverage of CGI Group with a $48 target price and
analyst's or each team's respective sector.
¹Target price is for 12 months.
an OUTPERFORM rating. CGI is one of the larger independent IT service
firms and, in our view, is well positioned to gain market share and grow FCF.
Research Analysts
Colin Moore, CFA ■ Constructive on IT services: On a macro level, we are constructive on the
416 352 4589 IT service sector as improving economic conditions in the U.S. and Western
colin.moore@credit-suisse.com Europe provide an increasingly supportive backdrop to corporate and IT
Robert Peters spend. Recent surveys suggest technology, and IT services in particular,
416 352 4550 represents relatively high corporate spending priorities.
robert.peters@credit-suisse.com
■ Servicing clients and shareholders: We believe that CGI is an attractive
investment within the IT service sector. Under its 'Build and Buy' strategy the
company has demonstrated a recurring ability to efficiently integrate
acquisitions into its operations and effectively operate a growing platform.
We continue to see opportunities for CGI to execute on its business model
to gain share in the fragmented global market, by leveraging the Logica
assets, making select acquisitions, and driving organic margin growth.
■ Financials at an inflection: In our view, CGI's financials are approaching
an inflection point, supported by ongoing margin improvement and fewer
revenue headwinds in 2015E. Additionally, as restructuring costs moderate
we expect CGI's cash conversion ratio to return to more normalized levels,
driving significant growth in FCF p.s. and scope for further stock re-rating.
■ Valuation: CGI is trading at a relatively attractive valuation of 9% FCF yield
and 12.1x forward P/E, in-line with its 1.5x average discount to U.S. peers.
Our $48 target is based on our DCF model that assumes an 8.5% WACC
and 1.0% terminal growth. Risks to our target price include failure to win new
bids, client spending trends, and execution on existing engagements.
Share price performance Financial and valuation metrics
Daily Jul 10, 2013 - Jul 09, 2014, 7/10/13 = C$30.79 Year 09/13A 09/14E 09/15E 09/16E
EPS (CS adj.) (C$) 2.30 2.95 3.15 3.27
38
Prev. EPS (C$) — — — —
33 P/E (x) 16.6 12.9 12.1 11.6
P/E rel. (%) 87.8 79.3 83.2 89.5
28
Jul-13 Nov-13 Mar-14 Revenue (C$ m) 10,084.6 10,628.3 10,911.5 11,222.2
Price Indexed Price Relative EBITDA (C$ m) 1,492.5 1,776.4 1,864.4 1,915.3
OCFPS (C$) 2.12 3.38 4.44 4.63
On 07/09/14 the TSX-Toronto Stock Exchange 300 Compo
P/OCF (x) 17.1 11.3 8.6 8.2
closed at 15215.19
EV/EBITDA (current) 8.9 7.4 7.1 6.9
Net debt (C$ m) 2,740 2,181 1,094 -48
Quarterly EPS Q1 Q2 Q3 Q4 Number of shares (m) 277.52 IC (current, C$ m) 6,795.65
2013A 0.44 0.56 0.63 0.67 BV/share (current, C$) 13.3 EV/IC (x) 1.8
2014E 0.65 0.72 0.75 0.76 Net debt (current, C$ m) 2,678.2 Dividend (current, C$) —
2015E 0.70 0.80 0.83 0.82 Net debt/tot eq (current, %) 24.3 Dividend yield (%) —
Source: Company data, Credit Suisse estimates.

DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST
CERTIFICATIONS, AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do
business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a
conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in
making their investment decision.

CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS BEYOND INFORMATION®


Client-Driven Solutions, Insights, and Access

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Table of contents
Investment View 3
Executive Summary 3
Investment Thesis 3
Opportunities for Growth 3
Financial Inflection 4
Valuation 4
Key Risks 4
IT Services Trends Positive 5
1) Economic Trends 5
2) Technology Trends 8
3) Micro Indicators Healthy 10
What it means 11
Build and Buy is Building Value 12
Reaching Global Scale 12
Buying - Surfacing M&A Returns 14
Builders not just Buyers 16
A view from HOLT® 17
Building and Buying Can Drive Further Market Share 19
Accounting for FCF Growth 20
Accounting Issues Raised by the Logica Acquisition 20
Assessing Accounting Quality 20
What it Means 24
Key Outlook Issues 25
Europe Outsourcing an Opportunity 25
U.S. Federal Government IT Trends 27
Canada: Stability at the Core 30
Balanced Delivery Network 32
Summary 33
Capital Structure 34
Capital Priorities 35
Financial Assumptions 37
Valuation 39
Key Risks 44
Appendix A: Company Overview 45
Appendix B: Balance Sheet & Cash Flow Forecasts 47
Appendix C: Management and Board of Directors 49
Appendix D: Compensation & Governance 50
Compensation 50
Governance 50
Appendix E: Peers Map 51

CGI Group (GIBa.TO) 2


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Investment View
Executive Summary
We are initiating coverage of CGI with a $48 target price and an OUTPERFORM rating. We are initiating coverage of
CGI has grown organically and through M&A to become one of the larger independent CGI with a $48 target price
global IT service firms. In our view, CGI is well positioned to continue to grow market and an OUTPERFORM
share and free cash flow as it leverages its larger European platform, benefits from cyclical rating.
and secular spending trends, and makes select acquisitions.

Investment Thesis
Constructive on IT Services
From a macro perspective, we are constructive on the IT services sector. In our view, CGI CGI is well positioned to
is well positioned to benefit from improving macro trends in Europe and U.S, which has benefit from improving
historically led to higher discretionary corporate IT spend. Additionally, recent corporate macro trends in Europe and
surveys indicate that technology spending, and IT services in particular, remains one of U.S.
the top priorities for U.S and Europe corporations. Overall, we believe these industry
tailwinds provide support to our expectations for CGI's revenues to recover, with revenues
expected to grow 3% y/y in 2015E up from -2% y/y in 2014E.
Build and Buy Strategy is Building Value
We believe CGI is an attractive investment within the sector. Using its Build and Buy CGI is an attractive
model CGI has quietly become one of the larger global IT service providers, with over 80% investment within the sector
of revenues now generated outside of Canada. Throughout its expansion, CGI has based on strong execution
demonstrated a recurring ability to integrate acquisitions effectively into its operations and of its Build and Buy strategy
a capacity to instill strong operating processes into its growing platform. The result of and opportunity for further
CGI's execution has been rising ROIC in a range of economic and revenue cycles, with its market share growth.
current ROIC reaching 13%. A HOLT® analysis suggests the market continues to
underestimate the future return potential of its assets, consistent with our own forecasts.
Over the long-term, we believe CGI is positioned to grow share in the relatively
fragmented IT service sector by continuing to execute on its build and buy strategy. In the
near-term, CGI should realize further returns from the recent Logica acquisition, as we
expect overall operating margins to rise to 13.1% in 2015E from 10.7% in 2013E.
Accounting for Free Cash Flow
Since the Logica acquisition, CGI's working capital has become more volatile and its cash CGI has a relatively healthy
conversion has declined owing largely to higher restructuring payments. We believe this accounting track record, and
volatility has contributed to some concerns over CGI's accounting quality and recurring that cash conversion trends
FCF potential. Our historical analysis highlights a healthy and relatively stable accounting will improve.
track record, consistent with peers. As we discuss, many of the recent working capital
adjustments appear specifically related to the large and complex acquisition of Logica. We
expect cash conversion trends to recover in 2015E, contributing to free cash flow growth
of over 40% to $3.38 per share and also providing scope for further stock re-rating.

Opportunities for Growth


Beyond the potential for rising corporate demand for IT services, we believe CGI's global CGI's global platform has a
platform has a number of well balanced growth levers. Europe represents a particularly number of well balanced
attractive market for CGI as it seeks to shift the legacy Logica revenue base to more growth levers.
profitable long-term contracts and potentially benefits from a growing demand for
outsourcing expertise in the region. In the U.S., ongoing Federal IT spend trends are a
near-term revenue headwind, but funding is poised to re-accelerate in the mid-term as
pent-up demand is released. Finally, we believe CGI's balanced local and global delivery

CGI Group (GIBa.TO) 3


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model, provide it with the necessary flexibility to offer high-end services and cost efficient
options as customer demands evolve.

Financial Inflection
In our view, CGI's financials are approaching an inflection point as revenue headwinds The company's revenues
moderate, operating margins show further improvement, and cash conversion returns to and cash conversion metrics
normalized levels. In fiscal 2014E we forecast revenues to decline -2% y/y due to are reaching an inflection
European contract pruning and near-term U.S. Federal funding pressures, but as these point.
headwinds moderate and European revenue accelerates, we expect revenue to grow +3%
y/y in 2015E. Margin improvement is expected to remain a key financial driver, and we
forecast operating margins to rise to 13.1% in 2015E from 10.7% in 2013 as CGI
continues to leverage its European platform. Overall, we estimate CGI's consolidated EBIT
increases 24% y/y in 2014E and 7% y/y in 2015E. Importantly, we also assume
restructuring costs and working capital swings are largely cycled by 2015E, providing a
basis for FCF conversion ratios to return to more normalized levels.

Valuation
The success of CGI's Build and Buy strategy has been reflected in its strong price Our $48 target, which is
performance over the past decade with its stock price rising at a CAGR of 16%, well above based on a DCF model,
both the S&P and TSX at 6%. Despite the strong stock price performance, CGI continues assumes an 8.5% WACC
to trade at a reasonable 12.1x forward P/E, and in-line with its average U.S. peer discount and 1.0% terminal growth
of 1.5x. We have historically found adjusted earnings to be one of the more important rate.
stock price drivers, and with adjusted EPS expected to rise to $3.15 in 2015E from $2.30
in 2013, a 2-year CAGR of 17%, we are constructive on the upside potential of the stock.
CGI also continues to support a healthy FCF yield of 9% in 2015E, a slight discount to
industry leader Accenture, to which it has historically tracked. Our $48 target price is
based on a DCF model that assumes an 8.5% WACC and 1.0% terminal growth rate.

Key Risks
Key risks for CGI include: (1) The risk of lower IT service demand due to cyclical or Key risks include lower IT
secular shifts, (2) Competitive pricing pressures on bids that could impact future margins service demand,
or revenue growth, (3) Lack of execution on existing contracts that could affect financials competition and contract
or stock sentiment, (4) M&A activity that is dilutive to earnings, and (5) Negative non-cash execution.
working capital changes that do not improve as expected.

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IT Services Trends Positive


In this section we consider some of the current drivers and issues affecting IT service
spend that we believe provide an overall positive backdrop to the sector and CGI's
revenue growth potential, including: 1) economic Cycle, 2) technology trends, 3) recent
booking trends.

1) Economic Trends
An improving economic cycle should be supportive of corporate IT service spend, a U.S. IT service spend tends
portion of which is discretionary. We have historically found that U.S. IT service spending to lag GDP by 2-4 quarters.
tracks GDP momentum on a two-to four- quarter lagged basis, with information processing
equipment and software investment (a sub-segment of the BEA's GDP number) the best
leading indicators. For some industry perspective, we highlight the growth trend of this
GDP sub-segment against industry leader Accenture's revenue growth in the Americas
(see Exhibit 1), as well as global IT service spending against Global GDP. (See Exhibit 2.)

Exhibit 1: U.S. GDP – Information Processing Equipment Exhibit 2: Global GDP vs. Global IT Service Revenues
& Software vs. Accenture C/C Revenues
25.0% 12.00%
20.0% 10.00%
15.0% 8.00%
10.0%
6.00%
5.0%
4.00%
0.0%
2.00%
-5.0%
0.00%
-10.0%
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
-15.0% -2.00%

-4.00%

-6.00%
GDP - Information Processing Equipment & Software
Accenture CC Revenues Y/Y Global GDP Y/Y Global IT Services Y/Y

Source: Thomson Reuters, Credit Suisse estimates Source: Thomson Reuters, Gardner, Credit Suisse estimates

As such, continued stability in the U.S. and rising corporate prospects in the UK and Improving macro trends in
Europe should be supportive of global IT service spend. According to our Credit Suisse the U.S. and Europe should
economic team global GDP is expected to rise to 3.2% in 2014E from 3.0% in 2013 led by be supportive of IT services.
developed markets in particular, and further accelerating to 3.9% in 2015E.

Exhibit 3: GDP Growth Forecasts by Region

10 8.8
8.3 8.2
7.5 7.3
8 6.4
6.1
5.5 5.3
6 4.5 4.9 4.7 4.5
2.7
4 4.8 5.0 5.2 5.2
4.5
3.6 3.9 3.9
2 2.6 3.0 3.1 3.0 3.2
2.6 2.8 2.4 2.6 2.4
2.0 2.4 2.0
0 1.4 1.5 1.4 1.2
-0.1
-2 -0.8

-4
-3.7
-6
02 03 04 05 06 07 08 09 10 11 12 13E 14E 15E

Global Developed markets Emerging markets

Source: Thomson Reuters, Credit Suisse Estimates

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European economic prospects, from which CGI now derives over 50% of its revenues, are
particularly encouraging. For example, after a very long recovery period, European
domestic demand is finally starting to show signs of improvement, which could be a
positive catalyst for improving corporate profitability.

Exhibit 4: Euro Domestic demand making a slow recovery


106
Domestic demand (2008Q1=100)

104
Euro area

102 US
Japan

100

98

96

94
2008 2009 2010 2011 2012 2013 2014
Source: Thomson Reuters

More specifically, European PMI data, a leading indicator for GDP growth, are also Key European markets are
showing signs of improvement in CGI's key European markets, including UK (~13% of showing PMI improvement.
consolidated revenues) and Sweden (~9%). Other key markets such as France are
showing less improvement but stable trends.

Exhibit 5: Business Activity PMI improving in UK, Sweden and Germany


70.0

65.0

60.0

55.0

50.0

45.0

40.0

35.0

30.0
7/1/2011 11/1/2011 3/1/2012 7/1/2012 11/1/2012 3/1/2013 7/1/2013 11/1/2013 3/1/2014

UK Services France Services Sweden Services Germany Services

Source: Thomson Reuters

Technology Spend remains a priority


Another useful macro indicator we track for IT services is the Duke/CFO Business Outlook CFO surveys highlight
survey. In the June 2014 survey, U.S. respondents were expected to increase their technology spending as
technology spending by 8% y/y, a historically high pace. near-term priority.

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Exhibit 6: U.S. CFO Outlook vs. CGI North American and Accenture America Revenues
25%
20%
15%
10%
5%
0%
-5%
-10%
-15%
-20%

CFO Outlook - Technology Spend CGI North American Revenues* Y/Y


Accenture C/C Revenues Y/Y

Source: Duke/CFO Business Outlook survey, Company data, Credit Suisse estimates;*CGI is excluded
between Q4.10-Qq.11 owing to the Stanley acquisition

Technology spending was above all other discretionary spending items with the exception
of general capital spending.

Exhibit 7: Expected Growth in Spend over next 12 months


10.0%
9.3%
9.0%
7.9%
8.0%

7.0%

6.0%

5.0%
4.0%
4.0%
3.0%
3.0%
2.3%
2.0%

1.0%

0.0%
Capital Technology R&D Advertising & Marketing Wages & Salaries

Source: Duke/CFO Business Outlook survey, Company data, Credit Suisse estimates

A recent Credit Suisse report highlighted similar spending outlooks in Europe. In Richard A CS survey highlights
Kersley's April 2014 report, titled, (Credit Suisse Executive Panel - Changing up a similar corporate spending
gear), 60 European corporates were polled on their spending plans. As highlighted in intentions in Europe.
Exhibit 8, the net balance of companies that were looking to raise spending in the next six
months vs. those planning to decrease, rose to 27% from 16% last Fall, its highest reading
since the September 2011 survey.

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Exhibit 8: Time series of corporate spending intentions – those expecting an increase


less those expecting a decrease

40%

20%

0%

-20%

-40%
Nov '10 May '11 Sep '11 Jan '12 May '12 Nov '12 Jun '13 Oct '13 Apr '14

Europe

Source: Credit Suisse proprietary survey

Just as importantly, European respondents also indicated that IT spending was one of
their highest priorities, behind only employment and wages.

Exhibit 9: Percentage of Respondents expecting spending to increase minus percentage


expecting it to decrease over the NEXT six months
40%
IT budget
30%

20%

10% Machinery expenditure

0%
Employment & Wages Advertising budget
-10% Building & Plant
expenditure
-20%
Travel budget
-30%
Cars & Commercial
Vehicles
-40% Apr-14 Survey Oct-13 Survey

Source: Credit Suisse proprietary survey

2) Technology Trends
Within the technology sector, there is an accelerating shift in corporate spend toward a Corporate spend is
confluence of digital technologies commonly referred to as SMAC (Social, Mobile, increasingly shifting to
Analytics, Cloud). Working together, these emerging technologies are creating new ways SMAC digital technologies.
for companies to interact with consumers, collaborate across the firm, and increase data
analytic capabilities to become smarter and quicker.

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For some context on the magnitude of the shift, a recent KPMG report titled, 'The SMAC
Code, Embracing new technologies' for future business, reported that in 2012:
"SMAC contributed approximately 20% of the total (world) information and
communication technology spending…growing at about 18% y/y year-on-year, i.e.
around six times the rate of the rest of the IT industry. At this rate it is expected
that these technologies will become 80% of the total spending by 2020.
As these trends accelerate there is some debate on the impact on traditional IT service We believe these
providers, particularly as more processes move into the cloud replacing some of the technology shifts will remain
traditional large-scale IT systems integration. In our view, we believe these changes will supportive of IT service
generally be supportive to the IT services sector in the mid-term, for the following reasons: spend.
(1) Change Provides Opportunity: We believe a substantive shift in technology
represents an opportunity for innovative IT service providers to help companies make
the necessary transitions and pull-through other services. In addition, in our opinion,
customization provided by IT service firms will remain an important requirement for
most mid-to-large companies based on specific corporate demands, security needs,
and challenges inherent in integrating a mix of software across the firm.
(2) A Shift in IT Spend: We believe any corporate savings gained from shifting legacy
spend to the cloud are likely to be re-invested in other areas. As such we expect a
shift in IT service spend, not necessarily a reduction.
(3) New Opportunities: Finally, IT service providers are in a position to leverage their
own proprietary IP and software to benefit from opportunities in the cloud. We estimate
roughly 16% of CGI's revenues are IP based, although it had reached 25% prior to the
acquisition of Logica.
The ongoing demand for IT services was evident in a recent Credit Suisse IT survey,
summarized in a report by Credit Suisse Analyst Kulbinder Garcha and his team, titled, IT
Hardware & Global Communications Technology: 2014 Outlook: Spending
muted, with Cloud shift to boot. The survey highlighted how the demand for IT
services is rising and remains one of the highest priorities for Enterprise IT spend.

Exhibit 10: Respondents asked for view on top priority Exhibit 11: Respondents asked for view on expected
spend in IT – Service demand remains strong growth in major IT segments
70% 7.0%

60% 6.0%
5.0%
50%
4.0%
40%
3.0%
30% 2.0%
20% 1.0%

10% 0.0%
PCs
Storage

Printing
Software

Networking
Services

x86 Server

-1.0%
0%
-2.0%
-3.0%
2014 vs. 2013 2013 vs. 2012
2014 2013 2012

Source: Credit Suisse IT Survey Source: Credit Suisse IT Survey

As such, while our IT Hardware & Global Communications Technology team expects IT service spend should
Enterprise IT spending to increase at a four-year CAGR of 4% y/y, IT services are outpace overall Enterprise
expected to increase at a CAGR of 5%, and above its historical CAGR of 2% from 2008 to IT spend.
2012.

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Exhibit 12: Enterprise IT Outlook CAGR 2012-2016E


6.00% 5.10%
4% 3.90%
Services revenue growth is
4.00% exp ected to outpace the overall
2.50% IT Industry and all of its
2.00% sub-components

0.00%

-0.80%
-2.00%

-4.00%
-3.90%

-6.00%
Services Total IT Hardware Storage Enterprise Printing Servers
Switching &
Routing

Source: Gardner, Credit Suisse Estimates

3) Micro Indicators Healthy


On a more micro level, CGI's backlog and booking trends remain healthy. For example, in CGI has healthy backlog
Q2.14 the backlog grew 8% y/y to $19.5 billion, representing two years of revenue. In and booking trends.
addition, despite some project run-off in Europe, overall book-to-bill trends remain
relatively healthy, currently tracking to a ratio of 105% on a trailing twelve-month period.

Exhibit 13: Trailing twelve-month period-Book-to-Bill Ratio


140%

120%

100%

80%

60%

40%

20%

0%
Q1.07 Q3.07 Q1.08 Q3.08 Q1.09 Q3.09 Q1.10 Q3.10 Q1.11 Q3.11 Q1.12 Q3.12 Q1.13 Q3.13 Q1.14

LTM Book-to-Bill Historical Average

Source: Company data

More specifically, there are already signs CGI is having success in re-accelerating Booking trends are
revenues in Europe with the region at an estimated book-to-bill ratio of 114% on a LTM improving in Europe.
basis. Encouragingly, CGI is seeing particular bookings momentum in regions that were
under pressure at Logica prior to the acquisition, including the UK, Sweden and Benelux.

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.Exhibit 14: Europe Quarterly Bookings and Revenues


2,500.0 m

2,000.0 m Bookings have begun to accelerate in


2014 and are pacing ahead of revenues
1,500.0 m

1,000.0 m

500.0 m

Bookings Revenues

Source: Company data, Credit Suisse Estimates

Owing to the mix of longer-term outsourcing agreements in overall bookings (outsourcing Consulting Book-to-Bill is
represents ~55% of CGI's revenues) we caution that book-to-bill doesn't always provide the better leading revenue
perfect visibility into near-term revenue trends. Consulting book-to-bill is often a better indicator, and also positive.
indicator due to its shorter contract lengths. CGI has only recently started to provide
disclosure of this metric, but it is currently tracking at a LTM ratio of 107%.

What it means
In summary, we are constructive on the overall IT service sector, as it should CGI's larger IT service
disproportionately benefit from improving macro trends and any increase in corporate platform is well positioned to
discretionary spend. Additionally, while there is an ongoing shift in technology spending, benefit from macro and
we believe the demand for IT services is still healthy, with expectations for above average secular trends.
demand over the mid-term. CGI's larger platform is well positioned to benefit from these
trends, and it is already starting to show some momentum in its key European region.

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Build and Buy is Building Value


By continuing to execute on its build and buy strategy CGI is positioned to grow share in CGI is well positioned to
the relatively fragmented IT service sector and to benefit from favorable industry trends. In grow share in the relatively
this section, we look at the success CGI has had at integrating its acquired U.S. and fragmented IT service sector
European assets, and its strong operating track record, which has contributed to attractive by continuing to execute on
ROIC and FCF growth. We also screened CGI through HOLT®, which suggests the its build and buy strategy.
market is continuing to underestimate the sustainability of its margins and platform.

Reaching Global Scale


CGI became an IT service leader in Canada, in part by signing several large outsourcing CGI has gained scale
agreements in the late 1990's and early 2000's, including a foundational C$4.5 billion ten- through a mix of growth and
year agreement with Bell Canada. CGI has since gradually expanded throughout North M&A, including three key
America and Europe supported by three key acquisitions, including: (1) U.S. based acquisitions.
American Management Systems in 2004; (2) Stanley Inc, a U.S. Federal IT provider in
2010 and; (3) European based IT service provider Logica in 2012.

Exhibit 15: Select Major Acquisition Investments


$3.0 B Logica

$2.5 B

$2.0 B

$1.5 B
American
Stanley
$1.0 B Management
Systems
$0.5 B

-
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
$(0.5 B)

Acquisition History ($)

Source: Company data

Following the Logica acquisition, Canada represents only 17% of its revenues but owing to Europe now represents over
its high margin, still generates 30% of the company's EBIT. The European region now 50% of revenues.
represents over 54% of CGI's revenues and roughly 40% of EBIT, followed by U.S. at 25%
and 26%, respectively.

Exhibit 16: Revenue Mix Exhibit 17: EBIT Mix


Asia Pacific Asia Pacific
4% 5%

Canada
17%
Canada
30%

Europe
39%
U.S.
Europe 25%
54%
U.S.
26%

Canada U.S. Europe Asia Pacific


Canada U.S. Europe Asia Pacific

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

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CGI has quietly climbed the ranks of global IT service providers. Although CGI does not CGI is now one of the larger
have the reach of some of the largest players, it now has the scale and growing expertise independent IT service
to provide a global solution that multinational companies are increasingly demanding from firms.
often fewer vendors. We'd note the sector remains somewhat fragmented, with IBM
Services the largest firm at only 6% of global revenues.

Exhibit 18: Revenues from Select IT service firms (2013 in USD)


$60.0 B $56.9 B

$50.0 B $46.8 B

$40.0 B

$30.4 B
$30.0 B
$23.5 B

$20.0 B
$15.0 B $13.8 B $13.2 B
$11.8 B
$9.5 B $8.8 B
$10.0 B

-
IBM Fujitsu Accenture HP CSC Capgemini NTT Data Atos CGI Group Cognizant
Services Services Services

Source: Company data

As we highlight in Exhibit 19, scale itself does not necessary lead to higher operating Operating leverage is limited
margin percentages, as cost of goods often represents over two-thirds of IT service in IT services – operating
revenues, limiting underlying operating leverage. Margin performance is also a reflection processes are important.
of the type of work and region in which the firm operates, as well as a reflection of the
firm's overall operating processes and execution.

Exhibit 19: Select IT service firms – Revenues vs. Margins


20%
Cognizant
18%

16%

14% Accenture

12%
CGI
10%
Cap Gemini
8%
Atos
6% CSC

4%

2%

0%
- 5,000 10,000 15,000 20,000 25,000 30,000

Source: Company data

Within this dynamic and fragmented IT service market we believe that CGI can gain further CGI is well positioned to
share by continuing to execute successfully on its Build and Buy model. gain share as it executes on
its Build and Buy model.

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Buying - Surfacing M&A Returns


CGI has been an opportunistic investor in the past, with a willingness to be patient and CGI has benefited from
wait for the right opportunity. For example, CGI tracked Logica closely for years as a being an opportunistic
potential target but made its ultimate bid when valuations were at a low and Logica in investor.
particular was dealing with operating challenges. As Exhibit 20 highlights, the European IT
services market value has recovered meaningfully since CGI acquired Logica.

Exhibit 20: Stock performance of European IT Service Companies


80%
CGI acquisition announced
60% Many European IT companies were trading at May, 31 2014
near trough prices when CGI acquired Logica
40%

20%

0%

-20%

-40%

-60%

-80%

Atos Capgemini Indra Logica Tieto

Source: Thomson Reuters, Company data, Credit Suisse estimates

CGI has also been successful in integrating acquired assets to drive strong returns. For CGI has been a strong
some perspective, we provide a timeline of some of the key events in CGI's U.S. integrator of acquired U.S.
expansion in Exhibit 21. Despite acquiring larger companies with lower margins, CGI has assets.
had great success at integrating the U.S. acquisitions while maintaining strong margins.

Exhibit 21: CGI U.S. Timeline – Revenue and Margins of Key Acquisitions

3,500 m 14%
Despite adding margin dilutive business, CGI has
3,000 m 11% successfully maintained U.S. margins 11%
12%
2,582 m
2,500 m 9% 10%

2,000 m 8%

1,500 m 6%
962 m 4%
1,000 m 885 m 4%

500 m 315 m 2%

- 0%
CGI US 2003 Ams 2003 Stanley 2010 CGI US 2013
(Est)

Revenues EBIT Margin

Source: Company data, Credit Suisse estimates

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With its acquisition of Logica, CGI has again demonstrated an ability to effectively It has also significantly
integrate assets. For example, CGI has grown Logica's margins from 6.3% at the time of improved Logica's margins.
the acquisition to 10.6% as of Q2.14, even after adjusting for provisions. Relative to its
major European peers and expectations for 2014, the early results are impressive.

Exhibit 22: European Margin Trends


11% 10.6%
CGI European margin has doubled thanks to
10%
cost rationalization at Logica assets
9% 8.5% 8.5%
8.1%
8% 7.7%
7.5%
6.8%
7% 6.6%
6.3%*
6%

5%

4%
2012 2013 2014E

ATOS Capgemini CGI

Source: Company data, Credit Suisse estimates

Importantly, we believe these savings are sustainable as the bulk of the savings to-date In our view the European
are from headcount reductions. We estimate CGI reduced Logica's legacy headcount by costs savings are
5,000 (a 12% reduction), representing savings of over $300 million, or equivalent to a 6% sustainable.
margin improvement.
CGI's ability to leverage acquired assets to drive rising returns over-time is evident by CGI has been able to
reviewing its ROIC performance. While acquisitions have often led to an initial step-down leverage acquisitions to
in ROIC (2004, 2011) the company has a track record of leveraging the expanded platform grow ROIC.
to accelerate ROIC, reaching 13% in 2013, above our estimated cost of capital of 8.5%.

Exhibit 23: ROIC – Credit Suisse Calculation


14%
13%
12%
12% 11% 12%
11% 11%
10% 10%
10%
8%
8%
7% 7%

6%

4%

2%

0%
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Source: Company data, Credit Suisse estimates

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Builders not just Buyers


CGI also has a strong track record as operators, an important distinction in the sector.
Owing to recent acquisitions, it is difficult to isolate organic revenues; however, we provide
our estimate for the company's organic growth trends in Exhibit 24. It is evident that, prior
to 2009 and the Great Recession, CGI generated relatively healthy organic revenue
growth ranging from +2% y/y to +10% y/y. The exception was in 2006 when its large
outsourcing contract with BCE was re-negotiated. Since the Great Recession, however,
we estimate organic revenues have slightly declined, in part due to weaker underlying
demand and in part as it actively prunes weaker contracts from acquired agreements.

Exhibit 24: CGI Organic Revenue Estimates


12.00%

10.00%

8.00%

6.00%

4.00%

2.00%

0.00%
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Q1.14 Q2.14
-2.00%

-4.00%

Source: Company data, Credit Suisse estimates.


CGI has a consistent record
Despite periods of softer revenue trends, CGI's Management team has consistently in driving margins across
focused on, and delivered, healthy operating margins and returns. For example, in Exhibit revenue cycles.
25, we compare CGI's EBIT margins to those of Accenture, the global leader in IT services
and margin performance. CGI margins declined in 2004 following the AMS acquisition and
the subsequent BCE contract adjustments, but gradually recovered to Accenture margin
levels by 2010. Margins have subsequently declined after absorbing the lower margin
Stanley and Logica assets but are already starting to re-accelerate as its current
integration progresses.

Exhibit 25: CGI Vs. Accenture Adjusted EBIT Margins


CGI has executed well on improving margins after initial dilution from acquisitions
18.0%
AMS Stanley Logica
16.0%
acquisition acquisition acquisition
14.0%

12.0%

10.0%

8.0%

6.0%

4.0%

2.0%

0.0%
FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14E

Accenture CGI

Source: Company data, Credit Suisse estimates

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The margin performance is despite having acquired a larger amount of lower margin CGI has generated
Federal Government revenues, and an increased level of M&A activity that has driven comparable FCF per
higher amortization of intangibles. CGI's ability to drive improving margins is due in part to employee to industry leader
its pricing discipline, a focus on higher-end (and higher margin) contracts, strong operating Accenture.
processes that allow for cost levers to be quickly pulled, and a balanced use of delivery
centers. The net result is that CGI has generated comparable FCF per employee to
industry leader Accenture.

Exhibit 26: FCF (Operating Cash Flow – less Capex) per Employee
$25,000

$20,000

$15,000

$10,000

$5,000

$-
2007 2008 2009 2010 2011 2012 2013 2014e 2015E

Accenture CGI

Source: Company data, Credit Suisse estimates

The operating performance has also allowed CGI to deliver strong FCF per share, rising at CGI has delivered a FCF
a CAGR of 19% y/y over the last decade. per share CAGR of 19% y/y.

Exhibit 27: FCF per Share (CFO Less Capex)


$4.00

$3.50 $3.38

$3.00

$2.50 $2.35

$2.00 $1.75
$1.61 $1.63
$1.48
$1.50 $1.35
$1.22

$1.00 $0.77 $0.72


$0.45
$0.50 $0.35
$0.08
$-
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014E 2015E

Source: Company data, Credit Suisse estimates

A view from HOLT®


CGI also appears attractively priced when screened through HOLT®, Credit Suisse's HOLT® suggests the
proprietary valuation tool that measures a company's ability to generate cash flow return market is underestimating
on investment (CFROI®). According to HOLT® the warranted price for CGI is closer to the sustainability of its
$60, representing upside potential of 64%. returns.

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Exhibit 28: HOLT® Warranted Price


Valuation
Relative Wealth Chart
Price CAD 37.60 upside

Warranted Price 61.75 +64%


Econom ic PE Ratio 5 year observed range
Current 18.4
Regional Industry 19.9

Low Median High


13.2 16.6 23.8
IT Services, US-Americas

Dividend Yield 0.0%

Risk
Probability of Default 0%
Average Credit Rating NA
Accounting Quality Poor

Mom entum
6m 3m 1m
CFROI Revisions -0.54 0.44 0.00
Price Change % 8.90 9.49 2.73

Source: HOLT®

A more practical way to interpret the HOLT® results is that the market essentially assumes The market is assuming
CGI will grow revenue at a CAGR of only 2% y/y with no further margin or asset growth. limited revenue growth with
Given the potential to accelerate revenue over the mid-term with its new European no margin improvement.
platform and improving macro environment conditions, along with Management's track
record at both margin improvement and asset turns, we think such a forecast is quite
conservative.
One other key finding from Exhibit 28 is that the large investments made in the early Asset growth has historically
2000's (i.e., high asset growth) led to a period of solid CFROI increases from 2005 to led to improving returns.
2010, a period in time in which there was limited acquisitions or asset growth. It reiterates
CGI's ability to integrate various assets into its platform and its success as a long-term
operator of those assets.
Successful throughout various cycles
Using HOLT®, we also reviewed the financial drivers of CGI success in more detail, CGI has used a mix of
summarized in Exhibit 29. As previously discussed, while organic revenue growth has not levers to drive returns,
always been achieved, CGI's has been able to grow returns by focusing on margin including revenues, margins
execution and driving higher asset turns. Again, this track record reflects positively on and asset turns.
Management's operating processes and ability to execute in different cycles.

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Exhibit 29: HOLT® Key Drivers – Sales, Operating Margins, Asset Turns

Source: HOLT®

Building and Buying Can Drive Further Market Share


In our view, CGI remains an attractive play within the IT service sector as it executes its CGI is well positioned to
Build and Buy strategy to gain share in the sector. CGI now has geographic reach and a gain further share and drive
broader range of expertise to serve those clients that are increasingly demanding a global further returns.
offering, providing an opportunity for CGI to further 'build' its platform. It also has the
Management team and experience to leverage incremental acquisitions.

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Accounting for FCF Growth


Since the acquisition of Logica CGI's balance sheet and working capital metrics have We expect CGI's cash
become more volatile, which has caused some investor uncertainty regarding CGI's true conversion to return to more
FCF potential. By our analysis, CGI has a relatively healthy accounting track record, and normalized levels in 2015E
we believe many of the recent accounting variability was due to the unique nature of the and have confidence in the
Logica acquisition. We expect CGI's cash conversion to return to more normalized levels accounting quality.
in 2015E, supporting FCF growth of over 40% per share to $3.38 per share, and providing
renewed confidence in the sustainability of CGI's free cash flow.

Accounting Issues Raised by the Logica Acquisition


When CGI acquired Logica it made a number of accounting adjustments that, like many CGI made a number of
accounting decisions, could either be viewed as conservative accounting or opportunistic, accounting adjustments
as it would have levers to increase future earnings in the absence of incremental free cash after acquiring Logica.
flow.
For example, in June 2012 prior to the deal closing, CGI issued a Business Acquisition
Report, in which there were two notable accounting adjustments:

■ Contract Provisions: CGI took two provisions, mostly related to expected losses on
revenue generating contracts and write-offs, totaling £173 million (or ~C$275 million).
The provisions were in addition to £39 million of charges Logica that had taken six
months earlier as part of a review of its contract profitability. If CGI was too
conservative in its contract review, it could re-release these provisions through the
P&L in future periods.

■ Working Capital Adjustments: In the same report, CGI made adjustments to


Logica's balance sheet to align revenue recognition accounting policies to its policies.
Key adjustments included $384 million related to lowering work-in-progress (revenue
recognized to reflect project progress, but not yet billed) and $118 million related to
deferred revenue (billed but revenue not yet recognized). Similarly, if CGI's initial
review of Logica's accounting policies were too conservative, it could technically allow
CGI to re-recognize these revenues in future periods.
Owing to some recent accounting volatility HOLT® also currently rates CGI as having HOLT® also currently rates
'poor' accounting quality. Specific issues include revenue recognition (swings in deferred CGI as having 'poor'
revenues as a percentage of total revenues) and Balance Sheet (growth in other accounting quality.
liabilities/assets). We highlight HOLT®'s current ratings in Exhibit 30.

Exhibit 30: HOLT® Accounting Quality

Source: HOLT®

Assessing Accounting Quality


In evaluating CGI's accounting quality, we put more emphasis on its long-term track
record. For CGI we considered three issues:

■ The unique aspect of the Logica acquisition;

■ CGI's historical M&A track record;

■ Historical analysis of accounting quality.

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1) Unique aspect of the acquisition


In our view the Logica acquisition was particularly unique given the size of Logica relative The Logica acquisition was
to CGI, with Logica at C$5.2 billion in revenues vs. CGI at C$4.2 billion. The size of the relatively unique in size and
acquisition naturally increases the likelihood that any write-downs would have a was experiencing some
disproportionate impact on CGI. operational challenges.
Additionally, based on our industry conversations, we believe the contract write-downs
taken by Logica ahead of CGI's acquisition (£39 million or only 1% of revenues) were a
sign of underlying contract challenges, and not evidence that all contracts were necessary
on track. Logica Management also suggested that further contract write-downs were a
risk, reporting writing in its 2011 Annual report after the £39 million write-down that:
"delivery risk management should have pinpointed these risks more clearly. As
highlighted here, as well as in the Financial review and Audit Committee reports,
future mitigation will be through more rigorous review of volume dependent
contracts in the bidding stages as well as continuing to drive standardization
faster to ensure more protection against difficult economic environments. We
have established an independent contract accounting function and stronger
delivery assurance."
It is also worth noting that Logica's work-in-progress as a percentage of sales was
relatively high at the time of acquisition at 13% (vs. peers that currently range 2-10%, for
example) leaving its P&L more exposed to any future contract problems. The significant
restructuring CGI has undertaken since the acquisition, along with some contract run-off
and asset sales, is also consistent with CGI's initial accounting treatment.
2) Track Record in M&A
It is also important to note that when CGI acquired Stanley in 2010 for over $1 billion (a Good track record in
company that by all accounts was viewed as a well-run Federal IT service provider with previous acquisitions.
strong revenue growth and above average Federal IT EBIT margins), there was very
limited working capital adjustments or contract write-downs. Similarly, when it acquired
AMS in 2004, (its first major foray into the U.S. and an asset that had recently faced some
project headwinds), there was also limited major working capital adjustments beyond
restructuring expense timing and revenue run-off. CGI's long-term Management team,
combined with a strong track record in M&A accounting, provides us with increased
confidence in its accounting quality.
3) Historical Analysis
In our view CGI screens well when reviewing key accounting metrics on a historical basis, CGI screens well when
including cash conversion, balance sheet quality and working capital. reviewing key accounting
metrics on a historical basis,
To analyze cash conversion, an important metric owing to the nature of long-term project
including cash conversion,
accounting, our global IT service team compares operating activities (before interest and
balance sheet quality and
tax) less capex with adjusted operating profit. This helps track how much of adjusted EBIT
working capital.
is getting converting to cash flow and the impact from working capital adjustments. In
reviewing CGI on this basis, there has been some volatility in years around acquisitions
and restructuring provisions (2004/2013), but its cash conversion record over the past
decade has been relatively healthy, averaging just over 100%.

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Exhibit 31: Historical Adjusted EBIT Cash Conversion


160%

140%

120%

100%

80%

60%

40%

20%

0%
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014E 2015E

Operating Cash Flow / Adjusted Operating Profit Average

Source: Company data, Credit Suisse estimates

Even on a recent three-year cumulative basis, a time period in which CGI has had Cash conversion has been
significant restructuring expenses and adjustments from the Logica transaction, it ranked mid-pact among peers
mid-pact among select peers. despite the Logica
acquisition affecting recent
Exhibit 32: Three- Year Cash Conversion years.
120%
111%
108%

100%
88% 88% 86%

80% 75%
71%

60%

40%

20%

0%
Accenture Booz Allen CGI CSC Cognizant Atos Capgemini
hamilton

Source: Company data, Credit Suisse estimates

Since the acquisition, we note that deferred revenues have increased to 8% (before Deferred revenues have
dropping to 7% in 2013); however, on a longer-term basis, it has been very steady increased after the Logica
averaging 3-5%. acquisition but CGI has a
steady historical record.

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Exhibit 33: Deferred Revenue/Sales


9%
8%
8%
7%
7%

6%
5%
5%
4% 4% 4%
4% 4%
4% 3%
3%
3% 3%

2%

1%

0%
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Deferred revenue/revenue

Source: Company data, Credit Suisse estimates

A broader metric that is useful to measure balance sheet quality for long-term contracts is CGI's revenue recognition
the spread between deferred revenues (a more conservative accounting approach in metrics suggests good
which cash is recognized ahead of revenue) and work in progress (a less conservative balance sheet quality.
approach in which revenue is recognized before the client is billed). If deferred revenues
are greater than work in progress, it should signal a more conservative revenue
recognition approach and more limited contract risk.
CGI's performance on this metric is not quite as strong as the industry leader Accenture,
but has historically been relatively stable in the -1% to -3% of sales range. The exception
was in 2010/2011 after it acquired Stanley, a reflection of higher work –in -progress
brought on by a larger mix of Federal contracts.

Exhibit 34: Deferred – Unbilled revenue (as % of Revenue)


4.0%
3.0%
2.0%
1.0%
0.0%
FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13
-1.0%
-2.0%
-3.0%
-4.0%
-5.0%
-6.0%
-7.0%

Accenture CGI

Source: Company data, Credit Suisse estimates

Although there was a decline in 2013, relative to its IT service peers, CGI's performance Revenue recognition metrics
on this metric remained well within its peer range as we highlight in Exhibit 35. compare favorably with its
peers.

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Exhibit 35: Deferred – Unbilled Revenue (as % of 2013 Revenue)


3.0%
2.5%

2.0%

1.0%

0.0%

-1.0% -0.5%

-2.0%
-1.8%
-2.0%

-3.0%
-3.0%
-3.3%
-4.0% -3.6%
Accenture Cognizant CGI Cap Gemini CACI Atos CSC

Source: Company data, Credit Suisse estimates

Overall, while change in non-cash working capital has fluctuated year-over-year when Working capital as a
viewed on a long-term basis it has been relatively steady, averaging just 1% of revenues. percentage of sales has
historically been stable.
Exhibit 36: Change in Working Capital as % of Sales
6%

4%
4%
2%
2% 2%

0%
0% 0%
-1% -1%
-2%
-2% -2%
-3% -3%
-4%
-4%
-6%
-6%
-8%
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014E 2015E

Working Capital/% Sales

Source: Company data, Credit Suisse estimates

As restructuring payments roll-off we assume net working capital to remain roughly 1% of We assume net working
revenues, including some negative net change in working capital as deferred capital to remain roughly 1%
revenue/sales moderates to more historical levels. of revenues.

What it Means
Although there has been some recent working capital volatility and cash flow uncertainty We expect that cash
around the recent Logica acquisition, we believe these issues will not impact the long-term conversion will ramp back to
sustainability of CGI's free cash flow. By the end of 2014E, we expect most of the its historical averages in
restructuring payments related to the Logica acquisition will have cycled and that cash 2015.
conversion will ramp back to its historical averages in 2015E. This trend would provide
scope for an acceleration in FCF, reaching $3.38 per share by our estimates, or 40% y/y
growth, and the potential for a further stock re-rating.

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Key Outlook Issues


In this section we review some of the key drivers of our forecasts that should be catalysts We believe there are a
for improving revenue trends and ongoing margin percentage improvement at CGI. We number of growth
consider a few topical issues, including: opportunities across CGI's
platform.
■ European Outsourcing Trends;

■ U.S. Federal IT spending Trends;

■ Canada: Stability at the Core;

■ CGI's Balanced Delivery Network;

Europe Outsourcing an Opportunity


CGI increased its exposure to Europe significantly after the acquisition of Logica,
increasing its revenues from a run-rate of approximately $200 million to over $5 billion. In
a relatively short period of time it has become an important market for CGI.

Exhibit 37: Revenue Mix 2012 - 2013


2012 Proforma Revenues 2013 Revenues
Total Revenues: $4.3 billion Total Revenues: $10.0 billion

Asia Pacific Asia Pacific


Europe 4% 4%
6%

Canada
17%
Canada
33%

U.S.
Europe 25%
54%
U.S.
57%

Canada U.S. Europe Asia Pacific Canada U.S. Europe Asia Pacific

Source: Company data

Since the acquisition, European constant currency revenue trends have declined, although CGI is shifting its attention
according to Management it is due to unprofitable contracts being wound down or sold. from cost savings to
regaining revenue share in
Europe.

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Exhibit 38: CGI Europe Constant Currency revenues Y/Y (excluding Logica comp Y/Y)
30.00%
25%

19%
20.00%
12%
9% 10%
10.00%
5% 4% 3%

0.00%
-1% -2% -1% -2% 0% -1%
-10.00% -7%
-9%
-14% -14%
-20.00%
-22%
-30.00%
Q4.08 Q2.09 Q4.09 Q2.10 Q4.10 Q2.11 Q4.11 Q2.12 Q4.12 Q2.13 Q4.13 Q2.14

Source: Company data, Credit Suisse estimates

Since the start of 2014, with a majority of the cost restructuring efforts behind it, CGI has Growing outsourcing
shifted its attention to regaining revenue share momentum in the region. Successful bid demand represents an
announcements may act as positive catalysts over the next few quarters, as it often takes opportunity for CGI.
9-12 months before contracts are awarded. We are constructive on the upside potential for
CGI in Europe, in part as there is a rising demand for Outsourcing sources, which is a
good match for CGI's expertise.
Outsourcing has been a rising trend for many years in Europe, although until recently it
has generally been more common in English-speaking countries such as the UK. For
some perspective on how the pace of these trends has evolved regionally, the larger India
IT service providers generate ~60% of their revenues from the U.S. and only 25% in
Europe. However, there are indications from the Indian-based firms that outsourcing
trends are gaining momentum more broadly across Europe. (See Exhibit 40.)

Exhibit 39: Top Five Indian IT Service Firms - Revenues Exhibit 40: Top Five Indian IT Service Firms - Recent Y/Y
by Region Revenue Trends
70% 50%
61%
60% 40%
50%
30%
40%
20%
30% 25%
10%
20% 14%
10% 0%
FY08 FY09 FY10 FY11 FY12 FY13
0% -10%
Americas Europe Others Americas Y/Y Europe Y/Y Others Y/Y

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

We believe greater interest in outsourcing is an opportunity for CGI to gain share as it has
significant experience in facilitating large-scale outsourcing agreements and gradually
shifting contract work into longer-term contracts across its delivery network. For example,
CGI took a prominent role in shifting leading Canadian companies to an outsourcing model
as the trend started to accelerate in that country, including the $4.5 billion Bell Canada

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agreement. It has since been involved in many large-scale outsourcing agreements,


across telecom, financial and government sectors.
CGI may have an opportunity within its own client base. As noted in the following exhibits, CGI's existing client base
prior to the acquisition of Logica, CGI had a greater mix of outsourcing in its revenues, as represents an opportunity
well as greater backlog duration, than Logica. The gap represents an initial opportunity for for longer-term agreements.
CGI to leverage its own experience to transition Logica's contracts to more long-term
agreements.

Exhibit 41: Revenue Mix prior to Logica Acquisition Exhibit 42: Backlog Duration prior to Acquisition
100% 4.50
90% 3.85
4.00
32%
80%
3.50
70% 56%
2.99
60% 3.00

Revenue years
50% 2.50
40%
2.00
68%
30%
44% 1.50
20%
10% 1.00

0% 0.50
Logica CGI
-
Outsourcing Consulting CGI Logica Outsourcing

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

Importantly, CGI has a track record in shifting revenues to longer-term recurring revenue CGI has a track record in
streams. Following its acquisition of AMS in 2004, CGI shifted recurring revenues from converting shorter projects
approximately 20% of AMS' base, to roughly 55% six years later. to recurring revenue
streams.
Exhibit 43: AMS Recurring Revenue Shift
60%
55%
AMS acquisition has shifted recurring
50% revenues from 20% to 55% over six years

40%

30%

20%
20%

10%

0%
2004 2010

Recurring Revenues as % of U.S. Revenues

Source: Company data, Credit Suisse estimates

U.S. Federal Government IT Trends


CGI generates roughly $1.4 billion in revenues, or 50% of its U.S. revenues, from the CGI generates 50% of its
Federal Government and agencies. Government services has been a difficult vertical in U.S. revenues from the
recent years, owing to ongoing Federal budget pressures and sequestration. In addition to Federal Government.
these broader challenges, CGI has also had to deal with negative press headlines from

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the fallout of the troubled Healthcare.gov website in the fall of 2013. Despite this back-drop
we remain constructive on the mid-term opportunities owing to CGI Federal's long-term
relationships, its valuable IP, and the prospect for improving federal funding in the mid-
term.
Background
Since 2010, the Federal Government IT budget has stalled at roughly $80 billion per Federal IT spending has
annum, and despite some recent clarity on overall Government funding, there has been been under budget and
uncertainty on how specific projects will be funded, with shorter contract durations and an funding pressures.
inclination toward extension of existing contracts.

Exhibit 44: Federal Government IT Budget


Stanley Acquisition
$90.0 B
$80.0 B
$70.0 B
$60.0 B
$50.0 B
$40.0 B
$30.0 B
$20.0 B
$10.0 B
-

Federal Grand Total Civilian Defense

Source: Federal Government, Company data, Credit Suisse estimates

CGI Federal has been a strong Government Partner


While not the largest provider, CGI's relationships with the Federal Government is CGI has a gained share in a
relatively deep and wide ranging across several departments, including the Department of difficult environment.
Defense (estimated at ~40% of Federal revenues) and a mix of Civilian departments.
Overall, we estimate CGI has just under a 2% market share of the Federal IT budget, and
in this challenging budget environment, it has modestly grown organic revenues and share,
as we highlight in Exhibit 45.

Exhibit 45: CGI Federal Gov't Billings and Estimated Market Share
1,600,000 2.0%

1.8%
1,400,000
1.6%
1,200,000
1.4%
1,000,000
1.2%

800,000 1.0%

0.8%
600,000
0.6%
400,000
0.4%
200,000
0.2%

- 0.0%
2009 2010 2011 2012 2013

Federal Government Billings Estimated % Share of Federal IT Spend (Right Axis)

Source: Federal Government, Company data, Credit Suisse estimates

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Relative to its Government service peers, CGI Federal has also delivered a relatively CGI has also delivered a
strong financial performance, with one of the higher two-year revenue CAGR's from 2011 strong financial performance
to 2013 and one of the higher operating margins (although we include CGI's non-Federal relative to peers.
business in its IT margin owing to lack of better disclosure, which may impact
comparisons).

Exhibit 46: 2-year Revenue CAGR Exhibit 47: EBIT Margins


25% 16%
20% 14%
15%
12%
10%
5% 10%
0% 8%
-5%
6%
-10%
-15% 4%
-20% 2%
-25%
0%

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

Importantly, based on recent contract tenders as disclosed by the Federal Government, CGI continues to gain
there also does not appear to be any near-term backlash from the Healthcare.gov issue, Federal bookings.
with bookings on a LTM relatively steady.

Exhibit 48: U.S. Federal Contracts Awarded

$500 m

$400 m

$300 m

$200 m

$100 m

Total CGI Total Stanley

Source: Federal Government, Company data, Credit Suisse estimates

Funding Trends May Represent a Mid-term Revenue Catalyst


Notwithstanding CGI's financial track record to-date and steady contract awards, the Federal funding pressures
ongoing lackluster pace of Federal funding may weigh on CGI's near-term revenue growth to limit growth in the near –
potential. There was already some evidence in Q2.14, with revenues from Federal term...
Government declining roughly -1% y/y and peers such as Booz Allen Hamilton and
Computer Science Corp's North American Public Sector division guiding for revenues to
remain down mid-single digits in their upcoming fiscal years.

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While we assume softer near-term revenue trends, we believe improving Federal funding But Federal funding should
over the mid-term may be a positive catalyst for shorter-cycle Government service improve over the mid-term.
providers such as CGI, owing to:

■ Funding likely to pick-up: There is expected to be a pick-up in contract awards as


the Government fiscal year-end approaches and as it addresses pent-up demand next
year. For example, according to CGI, it has $1.5 billion in bids submitted awaiting
awards, of which half are expected to be announced this year.

■ IT spend cannot be ignored: Our Channel checks suggest that while the overall
Federal IT budget may remain muted in fiscal year 2015 there is expected to be some
uptick in spending (i.e. 2016/2017) to preserve and secure critical systems.

■ Still pockets of Growth: There are still areas of growth within the Federal IT budget,
particularly in areas such as Cyber, Intelligence, Veterans, Health Care, and Tax
Collections, verticals in which CGI has expertise. Conversely, CGI has very limited IT
exposure to specific war efforts, which have been under particular revenue pressure.

■ IP and Long-term agreements provide downside protection: CGI also has long-
term agreements leveraging proprietary IP within the sector, including its Momentum
Enterprise Solution, a specifically designed Federal ERP system implemented at more
than 50 Federal agencies.
While we believe improving Federal funding can be a mid-term catalyst, CGI has
momentum with State/Local and Enterprise to help offset any near-term pressures.

Canada: Stability at the Core


Canada remains a cornerstone market for CGI with stable trends. Although the country Canada remains a
now represents only 17% of its consolidated revenues, it still drives 30% of EBIT owing to cornerstone market for CGI
very healthy margins that are currently above 20%. The margin performance reflects what with stable trends.
we estimate to be a relatively high mix of outsourcing projects, ongoing cost management
and the benefit of certain Quebec employment tax credits.
Mixed Revenue Trends Recently
As we highlight in Exhibit 49, since the great recession, constant currency revenues have
been muted, in part due to some divestitures but also to a sluggish consulting
environment. The decline may also reflect some pricing deflation as some work is shifted
to offshore centers from more local delivery centers.

Exhibit 49: Canada constant currency revenue vs. nominal GDP growth
40%

35%

30%

25%

20%

15%

10%

5%

0%
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
-5%

-10%

Canada Nominal GDP Y/Y CGI Canadian Revenues Y/Y

Source: Thomson Reuters, Company Data

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We attribute some of the slower revenue growth to a relatively weak IT spend environment Revenue impacted by
As Exhibit 50 highlights, Canadian hardware and software expenditures (a potential proxy weaker IT spend
for IT service spend) has been relatively modest since the great recession, often tracking environment.
below nominal GDP trends.

Exhibit 50: Nominal Information technology Investment by Component


20.00%

15.00%

10.00%

5.00%

0.00%

-5.00%

-10.00%

-15.00%
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Computer ICT Investment Software ICT Investment

Source: Center for the Study of Living Standards, Credit Suisse estimates

Larger competitors also remain active in Canada, keeping the market competitive. For Competition also remains
example, both IBM Canada and Fujitsu Canada, have recently built new data centers in active; however, we still see
the country. As a market leader there may naturally be fewer large scale opportunities for growth opportunities.
CGI although we believe there are still pockets of growth by potentially expanding further
into new markets (Resources), deepening relationships with the country's large banks, and
leveraging its broader global scale and IP portfolio from Logica. Recent booking results
suggest Canadian revenues may start to modestly pick-up.
Despite a softer revenue environment in Canada, CGI has effectively managed margins, In slower market, CGI still
another example of its strong operating processes. As highlighted in Exhibit 51, margins delivered strong margin
rose from 14% in 2007 to 19%, despite that, in 2007, corporate costs ($63 million) were performance.
reported in a separate line item, whereas in 2014 they were consolidated into divisions.

Exhibit 51: Canadian Margin Performance


$400 m 20%

$350 m 18%
16%
$300 m
14%
$250 m 12%
$200 m 10%

$150 m 8%
6%
$100 m
4%
$50 m 2%
- 0%
2007 2014

EBIT EBIT Margin

Source: Company data, Credit Suisse estimates.

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Balanced Delivery Network


CGI has a balanced delivery network, incorporating both local and offshore resources, that CGI has a balanced delivery
we believe supports its competitive positioning and provide levers to manage margins. We network.
estimate that CGI's delivery centers represent over 25% of its overall headcount, with
18,000 employees across 24 onshore, nearshore, and offshore locations.

Exhibit 52: Estimated Breakdown of CGI's Delivery Centre Headcount

Canada / Europe / Other


30%
India
53%
Phillipines /
Morroco
9%
U.S.
8%

India U.S. Phillipines / Morroco Canada / Europe / Other

Source: Company data, Credit Suisse estimates

Shifting work offshore to lower-cost regions has been an ongoing trend in IT services, as Shifting work offshore has
evident by success of the five major Indian-based IT service providers. been a long-term trend.

Exhibit 53: Major Indian IT service Firm Revenues– Nine-Year CAGR of 23%
$ 45,000 m 45.0%

$ 40,000 m 40.0%

$ 35,000 m 35.0%

$ 30,000 m 30.0%

$ 25,000 m 25.0%

$ 20,000 m 20.0%

$ 15,000 m 15.0%

$ 10,000 m 10.0%

$ 5,000 m 5.0%

- 0.0%
FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13

Revenues Revenues Y/Y (Right Axis)

Source: Company data, Credit Suisse estimates

Diversified global IT service firms have also been pushing a greater percentage of Diversified IT service firms
headcount to lower cost centers such as India, with Accenture and Capgemini now having have also been shifting
over 33% of their respective headcounts in the region. headcount to offshore
locations.

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Exhibit 54: Estimated Proportion of Employees in India (2013)


40%

34%
35% 33%

30%
26%
25%

20%

15% 14%

10%

5%

0%
CapGemini Accenture CSC CGI

Source: Company data, Credit Suisse estimates

Offshoring is a Mix of Opportunity and Risk for IT Service Firms


The benefits of offshoring are that clients can procure lower prices while at the same time CGI has lower percentage
IT service providers can drive higher margin percentages. The balancing act is that headcount in India, but in
offshoring can also contribute to pricing deflation, and as a result require incremental our view does not face
volume to grow margin on an absolute basis if it is replacing existing business performed higher financial risk from
locally. It can also lead to higher restructuring in the local market. offshoring trends.
Although CGI has a smaller headcount mix located in offshore centers, we do not believe
that its existing book is exposed to major offshoring risks, in part because over 40% of its
revenues are derived from Government and Healthcare verticals, clients who often put
emphasis on local solutions. (By comparison we estimate Accenture has 17% of its
revenues from these verticals.) In addition, CGI has just completed a significant
restructuring exercise in Europe, limiting the mid-term risk from any major headcount shifts
in that region. To the extent that new business opportunities arise that incorporates
offshoring, we believe CGI has sufficient flexibility to expand in the regions as required,
with the work likely to be done at higher margin percentages.
CGI's Local and Global Model a mix of Offense and Defense
Moreover, we would note that CGI's local and onshore mix is an important part of its go-to- Local and Global model is a
market strategy, an outcome of its focus on higher-value contracts that incorporate local key part of its competitive
relationships and IP, as compared to just volume by offering a labor cost arbitrage. positioning.
CGI's onshore and near-shore delivery centers across North America and Europe can also
offer client financial benefits, as they typically operate at 70% of the costs of a major city,
with the potential for higher security, quicker turnaround, and more maneuverability for
complex tasks. The economics of CGI's near-shore delivery solutions may be further
helped by local employment tax credits, such as those in Quebec. By comparison, we
estimate offshore services can operate at 30% of the costs of a major city but without
some of the flexibility previously noted.
Over the long-term, we also believe CGI's strong local relationships provides good Strong relationships should
defense against Indian-based IT service firms that are increasingly seeking to move protect against rising Indian
upstream and to become more locally based. based competition.

Summary
Overall, we believe CGI's global platform has a number of opportunities to drive revenue
growth, including rising interest in European outsourcing, a U.S. Federal IT funding
recovery and potentially some renewed momentum in its key Canadian market. Its local
and global delivery model should provide sufficient flexibility as client demands evolve.

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Capital Structure
Despite the recent acquisitions, CGI has a relatively strong balance sheet. Net debt to Despite acquisitions, CGI
LTM EBITDA is currently at 1.6x, as it has focused on paying down debt since the Logica still has a healthy balance
acquisition. Going forward, its strong balance sheet and free cash flow generation should sheet.
continue to support investments and acquisition, as well as a mix of share repurchases.
Debt Overview
CGI currently has $2.8 billion in short and long-term debt made up of U.S. senior CGI currently has $2.8
unsecured notes and revolving and term loan credit facilities, mostly related to the billion in short and long-term
acquisition of Logica in 2012. The majority of CGI's debt matures over the next five years, debt.
with CGI's term loan due in two payments in 2015/2016 and scheduled repayments on its
~$480 million U.S. senior notes starting in 2016. CGI's $1.5 billion credit facility also
matures in 2017, which had $211 million drawn as of Q2.14 plus a subsequent $487
million following the quarter. While 2016 represents the largest near -term debt maturities,
we do not see any pressure points owing to its modest leverage and free cash flow
generation.

Exhibit 55: CGI Net Debt Exhibit 56: CGI Debt Repayment Schedule
$3.5 B $1,200 m
$3,105 m $1,090 m
$3.0 B $2,740 m
$1,000 m
$2.5 B $2,181 m
$800 m
$2.0 B $698 m

$1.5 B $600 m
$1,094 m $494 m
$1,013 m
$898 m
$1.0 B
$400 m
$341 m $257 m
$0.5 B
$200 m $144 m
$-
$(60 m) $(48 m)
$(0.5 B) $-
2008 2009 2010 2011 2012 2013 2014E 2015E 2016E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E

Debt Repayment Schedule


Net Debt

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

Despite some relatively large acquisitions, CGI has historically had limited leverage, often
building cash positions ahead of a deal. A lower leverage range is consistent with many of
its IT service peers that typically operate in net cash positions.

Exhibit 57: Historical forward Net debt/EBITDA


2.5x

2.1x
2.0x
1.6x

1.5x 1.3x
1.2x 1.2x
1.2x

1.0x
0.6x
0.5x 0.5x
0.5x 0.4x

0.0x
0.0x
(0.1x)
-0.5x
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014E

Source: Company data, Credit Suisse estimates

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Common Equity
CGI has two tiers of equity authorized and issued: 276 million of Class A subordinate CGI has two tiers of equity.
voting shares with one vote per share, and 33 million Class B shares with ten votes per
share. Insider shareholders consisting of founders Serge Godin, André Imbeau, and the
Caisse de dépôt et placement du Québec control roughly 15% of the combined Class A
and B shares but ~64% of votes. The multi-voting class B shares are primarily controlled
by Mr. Godin and Mr. Imbeau who own 86% and 13% of the class B shares, respectively.
CGI's current short interest is ~8% of its float, in-line with its average trading range. It has
declined from recent highs as we believe investors have gained increased confidence in
the Logica opportunity.

Exhibit 58: Short interest as a % of Float


45m 18%
40m 16%
35m 14%
30m 12%

% of Float
25m 10%
Shares

20m 8%
15m 6%
10m 4%
5m 2%
- 0%

Short Interest Short Interest as % of Float

Source: Thomson Reuters, Company data, Credit Suisse estimates

Capital Priorities
Historically CGI's capital priorities have been on acquisitions, as it views itself as a growth CGI's historical priorities
company with an opportunity to expand the depth and reach of its global platform. have been on M&A and
However, when M&A conditions are not attractive CGI has also returned capital to share buybacks.
shareholders via share repurchases. We estimate share repurchases (net of some
issuance) have accounted for roughly 3% y/y per annum in share price growth.

Exhibit 59: Historical Capital Usage


$3.5 B

$3.0 B

$2.5 B

$2.0 B

$1.5 B

$1.0 B

$0.5 B

-
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
$(0.5 B)

Net Share Repurchases Dividends M&A

Source: Company data, Credit Suisse estimates

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Future Priorities
We believe acquisitions will remain CGI's near-term priority, and, in the absence of any We believe acquisitions will
such opportunities, share repurchases. As CGI views itself as a growth company with a remain CGI's near-term
unique opportunity to grow scale in IT services, we believe a dividend is unlikely in the priority to grow its global
near-term. platform.
For acquisitions, CGI appears to be focused on building depth in existing regions such as
the U.S. vs. further expanding geographic reach. We believe it is also placing emphasis on
growing its IP portfolio. Valuations may be higher for higher-growth software/IP assets and
in turn more difficult to drive accretion, although CGI's larger scale may provide
incremental opportunities to distribute across the platform.

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Financial Assumptions
Our model is based on the following key financial assumptions: Our model assumes a
recovery in revenues and
■ We assume constant currency revenue growth of -2% y/y in 2014E as we assume FCF conversion.
some ongoing revenue pruning in the European region, but rising to +3% y/y in 2015E
as it gains renewed momentum in Europe, in particular.

■ Foreign exchange should remain a revenue tailwind although based on current FX


rates the impact is likely to moderate in H2.14. Overall, we estimate FX will provide a
7% y/y revenue lift in 2014E but on an EBIT level it should be mostly hedged by an
offsetting FX impact on operating costs.

■ We estimate EBIT margins rise to 12.5% in 2014E from 10.7% in 2013 owing to
ongoing cost management, particularly related to the European integration. We
assume further margin improvement to 13.1% in 2015E based on ongoing
restructuring in Europe, overall cost management, and higher value revenue in the
mix. Overall we estimate EBIT increase 24% y/y in 2014E and 7% y/y in 2015E.

■ We also assume CGI starts to cycle its heavy Logica related restructuring costs, and
as such that cash conversion returns to more normalized levels. We note that in 2014
YTD there has also been about $20 million of provisions released through the P&L
related to the Logica acquisition, which we adjust in our 2015 estimates. Over the mid-
term, we forecast a ~1% negative change in non-cash working capital as a percent of
sales, in part as we model for deferred revenues to moderate. This range is consistent
with its long-term historical average.

■ We forecast capex intensity to remain stable at roughly 3% of revenues. We also


assume depreciation and amortization remains closer to 4% of revenues owing to
amortization of intangibles related to the Logica acquisition, supporting free cash flow
conversion trends.

■ In 2015E we forecast free cash flow grows over 40% to just under $1.1 billion, driven
by the roll-off of most Logica restructuring payments, as well as EBIT growth.
Evidence of revenue acceleration and cash conversion returning to more normalized
levels would be positive catalysts for the stock. Detailed Balance Sheet and Cash Flow
forecasts can be found in Appendix B.

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Exhibit 60: Income Statement Forecasts


(YE Sep, K CAD) 2012 2013 2014E 2015E 2016E 2017E
Income Statement
Revenue
Canada 1,212,615 1,685,723 1,686,430 1,711,726 1,745,961 1,780,880
Europe 565,290 4,288,247 4,575,346 4,699,860 4,838,696 4,970,207
U.S. 2,091,112 2,512,530 2,662,852 2,720,710 2,802,332 2,886,402
Other 903,437 1,598,124 1,703,628 1,779,155 1,835,217 1,890,273
Total Revenue 4,772,454 10,084,624 10,628,256 10,911,452 11,222,205 11,527,762
Y/Y 10% 111% 5% 3% 3% 3%
Opex 4,005,671 8,592,105 8,851,839 9,047,045 9,306,952 9,561,849
Y/Y 13% 114% 3% 2% 3% 3%
EBITDA 766,783 1,492,519 1,776,417 1,864,407 1,915,252 1,965,913
Y/Y 0% 95% 19% 5% 3% 3%
Margin % 16% 15% 17% 17% 17% 17%

Depreciation & Amortization 220,054 416,889 444,527 436,458 448,888 461,110


Acquisition related and Integration 254,973 338,439 84,579 - - -
Total Finance Costs 36,781 109,569 99,052 66,186 47,585 43,235
Other Income (Costs) (9,085) (3,316) - - - -
Income Tax Expense 131,397 171,802 280,050 354,058 368,883 380,008
Effective Tax % 50% 27% 26% 26% 26% 26%

Net Earnings 131,529 455,820 868,208 1,007,705 1,049,897 1,081,560

Basic EPS $0.50 $1.48 $2.80 $3.25 $3.37 $3.45


Diluted EPS $0.48 $1.44 $2.72 $3.15 $3.27 $3.35

Basic Weighted Average Shares Outstanding 263,432 307,900 309,807 310,339 311,963 313,563
Diluted Weighted Average Shares Outstanding 273,644 316,974 319,118 319,434 321,058 322,658

Adjusted EPS
Adjusted EBT 555,223 966,061 1,221,188 1,361,763 1,418,780 1,461,568
Adjusted Income taxes 153,891 238,396 280,050 354,058 368,883 380,008
=Income tax expense prior to Adjustments 401,332 727,665 941,137 1,007,705 1,049,897 1,081,560

Basic EPS $1.55 $2.36 $3.04 $3.25 $3.37 $3.45


Diluted EPS $1.50 $2.30 $2.95 $3.15 $3.27 $3.35

Cash Flow & Leverage

Total Net Debt 3,105,313 2,739,949 2,181,028 1,094,333 (48,069) (1,225,550)


Net Debt NTM / EBITDA 2.1x 1.5x 1.2x 0.6x 0.0x -0.6x

FCF 466,115 1,110,121 1,159,121 1,137,832 1,165,085 1,199,926


Operating activites 437,304 952,813 1,298,004 1,486,255 1,562,798 1,608,436
non-cash working capital 175,958 (281,556) (219,583) (66,745) (75,852) (83,206)
Total Cash provided by operating activities 613,262 671,257 1,078,421 1,419,510 1,486,946 1,525,230
Less: Capex (133,538) (244,619) (327,726) (338,255) (347,888) (357,361)
Free Cash Flow 479,724 426,638 750,695 1,081,255 1,139,058 1,167,870
Source: Company data, Credit Suisse estimates

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Valuation
Historical Valuation
The success of CGI's build and buy strategy has been reflected in its strong stock price Over the past 10 years CGI
performance. Over the past ten years CGI has averaged a 16% CAGR in its stock price, has averaged a 16% CAGR
slightly below Cognizant but above Accenture and well above the S&P and TSX at 6%. in its stock price, well above
the S&P and TSX at 6%.
Exhibit 61: 10 –year CAGR Stock Price Change for select Diversified IT service providers
25% 24%

20%
16%
15%
13%

10%

6% 6% 5%
5% 4% 3%

0%
Cognizant CGI Accenture S&P TSX S&P 500 Cap Gemini CSC Atos

Cognizant CGI Accenture S&P TSX S&P 500 Cap Gemini CSC Atos

Source: Thomson Reuters, Company data, Credit Suisse estimates

P/E Analysis
As we highlight in Exhibit 62, forward P/E has historically been an important indicator of Forward P/E has historically
CGI's stock price. We remain constructive on the stock's upside potential based on our been an important indicator
expectations for adjusted EPS to rise to $3.15 in 2015E from $2.30 in 2013, a 2-year of CGI's stock price.
CAGR of 17%.

Exhibit 62: CGI stock index vs. Adjusted EPS


300.00 $3.00

250.00 $2.50

200.00 $2.00

150.00 $1.50

100.00 $1.00

50.00 $0.50

- $0.00
7/1/1999 12/1/2000 5/1/2002 10/1/2003 3/1/2005 8/1/2006 1/1/2008 6/1/2009 11/1/2010 4/1/2012 9/1/2013

Adjusted EPS S&P TSX CGI Stock

Source: Thomson Reuters, Company data, Credit Suisse estimates

On a price-to-adjusted earnings basis, CGI's forward P/E remains in-line with its historical CGI's forward P/E remains
average, as the stock price increase has been proportionate with its earning accretion. in-line with its historical
Relative to select U.S. peers, its trading ratio is roughly in-line with its historical discount of average.
1.5x.

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Exhibit 63: CGI Historical Forward P/E Exhibit 64: Forward P/E vs. Select U.S. peers
14.0x 3.00

13.0x 2.00

12.0x 1.00

11.0x 0.00

-1.00
10.0x
-2.00
9.0x
-3.00
8.0x
-4.00

-5.00
1/1/2008 1/1/2009 1/1/2010 1/1/2011 1/1/2012 1/1/2013 1/1/2014
CGI Group Average
+2 Std. Dev -2 Std. Dev Average Vs. US

Source: Thomson Reuters, Company data, Credit Suisse estimates Source: Thomson Reuters, Company data, Credit Suisse estimates

EV/EBITDA
On an EV/EBITDA basis, CGI is now trading at a forward EV/EBITDA of 7.1.x, on the high- Forward EV/EBITDA of
end of its more recent average of ~6.0x and slightly above its 1.25x historical discount to 7.1x, on the high-end of its
select U.S. peers. The higher EV/EBITDA reflects in part its higher leverage following the historical average of 6.0x
acquisition compared with peers that typically run net cash balances.

Exhibit 65: CGI Historical EV/EBITDA FY2 Exhibit 66: CGI Fwd EV/EBITDA vs. Select U.S. peers
1.00
9.0x
0.50
8.0x
0.00

7.0x -0.50

-1.00
6.0x
-1.50
5.0x -2.00

4.0x -2.50

-3.00
3.0x
1/31/2008 1/31/2010 1/31/2012 1/31/2014 -3.50
1/1/2008 1/1/2009 1/1/2010 1/1/2011 1/1/2012 1/1/2013 1/1/2014
CGI Average since 2008
+2 std dev -2 std dev Average Vs. US

Source: Thomson Reuters, Company data, Credit Suisse estimates Source: Thomson Reuters, Company data, Credit Suisse estimates

While industry EV/EBITDA multiples are high relative to post-recession multiples, they are Industry EV/EBITDA
mid-range when viewed over previous mid-to-late cycles. multiples are mid-range on a
longer-term view.

CGI Group (GIBa.TO) 40


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Exhibit 67: Historical EV/EBITDA for Select U.S. Peers


14.0x

12.0x

10.0x

8.0x

6.0x

4.0x

2.0x

0.0x
1/1/2003 2/1/2004 3/1/2005 4/1/2006 5/1/2007 6/1/2008 7/1/2009 8/1/2010 9/1/2011 10/1/2012 11/1/2013

US Average

Source: Thomson Reuters, Company data, Credit Suisse estimates

FCF Yield
One of the most important valuation metrics we track for CGI is related to FCF. Over the FCF yield on 2015E remains
past four years, CGI has traded at an average FCF yield of 9-10% y/y and the stock is healthy at 9%.
currently trading in that range. On a relative comparison basis, CGI is trading a slight
discount to Accenture, a stock that it has typically tracked on a FCF yield basis. (See
Exhibit 69.) In our view, we believe a 9% FCF yield remains attractive relative to CGI's
potential long-term growth profile and that, as the stock re-rates, it has the potential to
trade at the lower-end of its historical FCF yield range of 6-7%.

Exhibit 68: Historical FCF Yield Exhibit 69: FCF Yield Historical – CGI & Accenture
14% 20%
13% 18%
16%
12%
14%
11% 12%
10% 10%
8%
9%
6%
8%
4%
7% 2%
0%
6%
4/1/2011 10/1/2011 4/1/2012 10/1/2012 4/1/2013 10/1/2013 4/1/2014

CGI Group average


Accenture CGI
+2 Std Dev -2 Std Dev

Source: Thomson Reuters, Company data, Credit Suisse estimates Source: Thomson Reuters, Company data, Credit Suisse estimates

Relative Comparison
On a relative basis we believe CGI screens attractively against a basket of global CGI screens attractively
comparisons, including IT service providers in the U.S., Europe and India. For example, in against a basket of global
2015, the global group is forecast to grow EBITDA at a two-year CAGR of 10% y/y, with comparisons,
an EV/EBITDA of 8.8x versus CGI at 12% y/y and 7.1x, respectively. Similarly, CGI is
trading at a P/E multiple of 12.1x versus the group at 15.1x, despite a growth rate of 17%
y/y versus the group at 13%.

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Exhibit 70: Valuation Comparisons


2-YR
Company Price Sales 2-YR EV/Sales EBITDA EBITDA EV/EBITDA EB
Enterprise Value 2013 2014E 2015E Sales CAGR 2014E 2015E 2013 2014E 2015E CAGR 2014E 2015E

North American
CGI Group $38.02 $13,291 $10,085 $10,628 $10,911 4% 1.3x 1.2x $1,493 $1,776 $1,864 12% 7.5x 7.1x

Accenture Plc $80.64 $48,511 $28,563 $29,876 $31,878 6% 1.6x 1.5x $4,660 $4,871 $5,178 5% 10.0x 9.4x
Computer Sciences Corp. $63.30 $9,692 $14,993 $12,998 $12,998 -7% 0.7x 0.7x $1,683 $2,038 $2,189 14% 4.8x 4.4x
International Business Machines Corp.
$188.42 $219,718 $99,751 $97,397 $98,004 -1% 2.3x 2.2x $26,127 $27,196 $28,677 5% 8.1x 7.7x
Hewlett Packard $33.65 $73,395 $112,298 $112,035 $109,158 -1% 0.7x 0.7x $13,689 $14,438 $14,302 2% 5.1x 5.1x
Average -1% 1.3x 1.3x 7% 7.0x 6.6x

Europe
Capgemini € 53.41 € 7,897 € 10,092 € 10,264 € 10,620 3% 0.8x 0.7x € 1,065 € 1,112 € 1,192 6% 7.1x 6.6x
Atos € 59.38 € 5,038 € 8,615 € 8,637 € 8,718 1% 0.6x 0.6x € 974 € 1,001 € 1,052 4% 5.0x 4.8x
Average 2% 0.7x 0.7x 5% 6.1x 5.7x

India Based
Cognizant Technology Solutions Corp.$50.37 $28,435 $8,843 $10,397 $12,124 17% 2.7x 2.3x $1,993 $2,274 $2,613 14% 12.5x 10.9x
Tata Consultancy Services ₹ 2,398.15 ₹ 4,538,289 ₹ 629,895 ₹ 818,094 ₹ 940,697 22% 5.5x 4.8x ₹ 180,870 ₹ 251,322 ₹ 284,678 25% 18.1x 15.9x
Infosys ₹ 3,310.35 ₹ 1,604,982 ₹ 403,520 ₹ 501,330 ₹ 535,581 15% 3.2x 3.0x ₹ 115,280 ₹ 134,150 ₹ 147,641 13% 12.0x 10.9x
Wipro Ltd ₹ 545.30 ₹ 1,214,552 ₹ 374,256 ₹ 437,549 ₹ 483,228 14% 2.8x 2.5x ₹ 80,807 ₹ 100,460 ₹ 111,851 18% 12.1x 10.9x
HCL Techno ₹ 1,473.20 ₹ 960,190 ₹ 255,811 ₹ 330,448 ₹ 373,207 21% 2.9x 2.6x ₹ 57,057 ₹ 86,398 ₹ 93,714 28% 11.1x 10.2x
Average 18% 3.6x 3.2x 21% 13.3x 12.0x

U.S. Government Services


Booz Allen Hamilton Holding $21.02 $4,466 $5,758 $5,479 $5,205 -5% 0.8x 0.9x $520 $533 $513 -1% 8.4x 8.7x
CACI International, Inc. $69.31 $2,897 $3,682 $3,550 $3,492 -3% 0.8x 0.8x $325 $321 $319 -1% 9.0x 9.1x
SAIC $43.99 $2,376 n.a. $4,121 $3,855 n.a. 0.6x 0.6x n.a. $196 $258 n.a. 12.1x 9.2x
ManTech International Corp. $29.26 $1,013 $2,310 $1,953 $1,933 -9% 0.5x 0.5x $171 $129 $135 -11% 7.9x 7.5x
Maximus $42.63 $2,756 $1,331 $1,704 $1,917 20% 1.6x 1.4x $213 $273 $298 18% 10.1x 9.3x
Sapient $15.73 $1,955 $1,259 $1,438 $1,618 13% 1.4x 1.2x $160 $187 $236 21% 10.5x 8.3x
Average 3% 1.0x 0.9x 5% 9.7x 8.7x

Total 7% 1.7x 1.6x 10% 9.6x 8.8x

Source: Thomson Reuters, Company data, Credit Suisse estimates

Exhibit 71: Valuation Comparisons


2-YR
Company Price EBIT 2-YR EBIT EV/EBIT EPS EPS P/E Div Yield FCF Yield
Enterprise Value 2013 2014E 2015E CAGR 2014E 2015E 2013E 2014E 2015E CAGR 2014E 2015E 2014E

North American
CGI Group $38.02 $13,291 $1,076 $1,332 $1,428 15% 10.0x 9.3x $2.30 $2.95 $3.15 17% 12.9x 12.1x n.a. 7%

Accenture Plc $80.64 $48,511 $4,067 $4,264 $4,578 6% 11.4x 10.6x $4.21 $4.53 $4.93 8% 17.8x 16.4x 2% 6%
Computer Sciences Corp. $63.30 $9,692 $607 $1,020 $1,136 37% 9.5x 8.5x $2.18 $3.91 $4.49 44% 16.2x 14.1x 1% 12%
International Business Machines Corp.
$188.42 $219,718 $21,449 $22,813 $24,267 6% 9.6x 9.1x $16.35 $17.87 $19.95 10% 10.5x 9.4x 2% 8%
Hewlett Packard $33.65 $73,395 $9,078 $9,971 $9,935 5% 7.4x 7.4x $3.35 $3.75 $3.84 7% 9.0x 8.8x 2% 12%
Average 13% 9.5x 8.9x 17% 13.4x 12.2x 9%

Europe
Capgemini € 53.41 € 7,897 € 857 € 922 € 1,002 8% 8.6x 7.9x € 2.96 € 3.61 € 3.98 16% 14.8x 13.4x 2% 6%
Atos € 59.38 € 5,038 € 645 € 671 € 722 6% 7.5x 7.0x € 4.32 € 4.39 € 4.74 5% 13.5x 12.5x 1% 6%
Average 7% 8.0x 7.4x 10% 14.2x 13.0x 6%

India Based
Cognizant Technology Solutions Corp.$50.37 $28,435 $1,821 $2,079 $2,389 15% 13.7x 11.9x $2.19 $2.54 $2.91 15% 19.8x 17.3x n.a. 6%
Tata Consultancy Services ₹ 2,398.15 ₹ 4,538,289 ₹ 170,079 ₹ 238,079 ₹ 259,279 23% 19.1x 17.5x ₹ 71.23 ₹ 97.63 ₹ 108.85 24% 24.6x 22.0x 1% 3%
Infosys ₹ 3,310.35 ₹ 1,604,982 ₹ 104,290 ₹ 120,410 ₹ 131,034 12% 13.3x 12.2x ₹ 164.87 ₹ 186.35 ₹ 205.59 12% 17.8x 16.1x 2% 5%
Wipro Ltd ₹ 545.30 ₹ 1,214,552 ₹ 69,972 ₹ 89,354 ₹ 100,329 20% 13.6x 12.1x ₹ 26.98 ₹ 31.66 ₹ 36.01 16% 17.2x 15.1x 1% 4%
HCL Techno ₹ 1,473.20 ₹ 960,190 ₹ 50,689 ₹ 79,027 ₹ 85,554 30% 12.2x 11.2x ₹ 57.20 ₹ 87.87 ₹ 99.82 32% 16.8x 14.8x 1% 5%
Average 21% 14.5x 13.3x 21% 19.1x 17.0x 4%

U.S. Government Services


Booz Allen Hamilton Holding $21.02 $4,466 $446 $461 $442 0% 9.7x 10.1x $1.65 $1.63 $1.54 -3% 12.9x 13.6x 2% 10%
CACI International, Inc. $69.31 $2,897 $271 $255 $248 -4% 11.4x 11.7x $6.35 $5.33 $5.31 -9% 13.0x 13.1x 0% 9%
SAIC $43.99 $2,376 n.a. $183 $240 n.a. 13.0x 9.9x n.a. $2.27 $2.86 n.a. 19.4x 15.4x 1% n.a.
ManTech International Corp. $29.26 $1,013 $141 $99 $104 -14% 10.3x 9.8x $2.14 $1.36 $1.64 -12% 21.6x 17.8x 3% 11%
Maximus $42.63 $2,756 $177 $226 $254 20% 12.2x 10.8x $1.60 $2.07 $2.35 21% 20.6x 18.2x 0% n.a.
Sapient $15.73 $1,955 $120 $150 $183 23% 13.1x 10.7x $0.54 $0.68 $0.82 23% 23.2x 19.3x 0% 4%
Average 5% 11.6x 10.5x 4% 18.5x 16.2x 9%

Total 12% 11.5x 10.5x 13% 17.0x 15.1x 7%

Source: Thomson Reuters, Company data, Credit Suisse estimates

CGI's EV/EBITDA multiple and EBITDA growth relative to its peers is highlighted visually
in Exhibit 72.

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Exhibit 72: EV/EBITDA by Sector


25%
India Based

20%
2-year EBITDA CAGR (%)

15%

CGI
10%
North America Based
Europe Based
5% U.S. Government
Services

0%
4.0x 5.0x 6.0x 7.0x 8.0x 9.0x 10.0x 11.0x 12.0x 13.0x 14.0x
EV / EBITDA

Source: Thomson Reuters, Company data, Credit Suisse estimates

Within Canada we note there are few useful comparisons, owing to the relatively small
size of the sector and mix of constituents. Given this context, however, CGI may
disproportionately benefit from any demand for Canadian technology stocks.

Exhibit 73: Canadian Technology Comparisons


2-YR
Company Price Enterprise EPS EPS P/E Div Yield FCF Yield
Value 2013 2014E 2015E CAGR 2014E 2015E 2014E

Canada Technology Companies


CGI Group IT Services $38.02 $13,291 $2.30 $2.95 $3.15 17% 12.9x 12.1x n.a. 7%

Constellation Software Inc Soffware $265.29 $5,995 $11.64 $11.90 $12.16 2% 22.3x 21.8x 1.6% 5%
Celestica Equipment Mfr. $13.26 $1,624 $0.98 $1.00 $1.02 2% 13.3x 13.0x n.a. 6%
BlackBerry Telecom Hardware $11.40 $5,677 ($1.04) ($0.97) ($0.90) -7% n.a. n.a. n.a. 47%
Computer Modelling Group Ltd Software $14.70 $1,084 $0.37 $0.37 $0.38 1% 39.6x 39.1x 2.5% 3%
Open Text Corporation Software $51.60 $6,369 $3.30 $3.33 $3.37 1% 15.5x 15.3x 0.3% 5%
Average 0% 22.7x 22.3x 1% 13%
Source: Thomson Reuters, Company data, Credit Suisse estimates

Our $48 target price is based on a WACC of 8.5% and a Terminal growth rate of 1.0%. We Our $48 target price is
highlight the sensitivities to our target price in Exhibit 74. Our target price implies a NTM predicated on a WACC of
FCF yield of ~8%, implying some modest multiple appreciation that we believe is 8.5% and Terminal growth
achievable as the company's revenue and cash conversion outlook improves. rate of 1%.

Exhibit 74: Valuation Sensitivities on our 2015E


WACC
$ 48.30 7.5% 8.0% 8.5% 9.0% 9.5%
Terminal Growth

0.50% $53.61 $49.71 $46.29 $43.28 $40.61


0.75% $54.98 $50.85 $47.27 $44.12 $41.33
1.00% $56.44 $52.08 $48.30 $45.00 $42.09
1.25% $58.03 $53.40 $49.41 $45.94 $42.89
1.50% $59.74 $54.82 $50.60 $46.95 $43.75
Source: Company data, Credit Suisse estimates

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Key Risks
Key risks for CGI include, but are not limited to, the following:
Market Share
CGI competes with many strong international firms and its future business is contingent on CGI competes with many
maintaining and growing its current market share within this ecosystem. Over the long- international and regional
term, CGI may also face increasing competitive pressure and pricing deflation from Indian- firms.
based IT service firms that are seeking to move up the value chain. Finally, CGI is also
dependent on hardware/software partnerships within the IT sector and any adverse
change in relationship could have an impact on its growth potential.
Acquisitions
CGI's continued ability to identify potential acquisition targets and execute on transactions CGI may make dilutive
both large and small is a key pillar of CGI's growth strategy. If CGI is not able to make acquisition or be unable to
further acquisitions or acquires companies that do not fit well with its existing business, it find new opportunities.
could have a material impact on long-term growth prospects. Additionally, with recent
acquisitions, CGI is now large enough in size that future acquisitions will likely have
smaller impact. We believe CGI's strong M&A track record helps mitigate this risk.
Contracts
CGI's revenues may be at risk if any ongoing work or contracts in backlog are cancelled or CGI may experience
there are performance issues. Additionally, the majority of CGI's contracts are performed execution risks.
on a fixed-price basis. If CGI does not accurately estimate costs associated with these
contracts, there could be potential profit shortfalls. In our view, CGI has very strong
contract bidding and operating processes to help limit the overall risks.
Client Concentration
The company derives a large portion of revenue from the U.S. Federal government and its CGI has some client
agencies. If the U.S. government agency, or other key clients, were to materially decrease concentration risk, namely
the business that does with CGI, it may be difficult to replace these revenues. the U.S. Federal
government.
Economic Sensitivity
CGI's business is driven by the level of business activity of its clients, which can be CGI's business is sensitive
affected by current economic conditions. Any slowdown in the current economic recovery to economic trends.
could lead to cancellation or deferral of existing contracts and delays in entering into new
engagements. CGI has demonstrated an ability to manage variable and fixed-cost levers
in periods of slower revenue growth, which would help offset economic risk.
FX Impact
CGI generates revenue and cost in currency other than CGI's reported currency of CGI has some FX exposure,
Canadian dollars. The company naturally hedges its profits as costs are matched with the although does have a
currency in which revenues are denominated, and it also employs some currency hedges. natural hedge.
If currencies weaken against the Canadian dollar, the company's consolidated financial
results could be affected.
Voting Rights
As of December 13, 2013, 55% of the aggregate voting rights are attached to the There is a risk that voting
Outstanding Class B shares. The multi-voting class B shares are primarily controlled by Mr. shareholders may conflict
Godin and Mr. Imbeau, who own 86% and 13% of the class B shares, respectively. To the with non-controlling
extent that the interests of the voting control group conflicts with that of non-controlling shareholders.
shareholders, there may be some risk to shareholder returns.

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Appendix A: Company Overview


CGI is one of the larger global independent IT service companies. The company is based CGI trades on the TSX and
out of Montreal, Canada with its stock trading on both the Toronto TSX (as GIB.A) and on NYSE.
the NYSE as (GIB). CGI provides high-end IT and management consulting services, as
well as outsourcing for both IT and business functions.

Exhibit 75: Revenue Mix by Service Type

Systems Integration &


Consulting
44% Outsourcing
56%

Outsourcing Systems Integration & Consulting

Source: Company data

The company has a presence in 40 countries with over one-half its revenues now coming The company has a
from the Europe region. presence in 40 countries.

Exhibit 76: Revenue split by Geographic Region


Asia Pacific
4%

North America
42%

Europe
54%

North America Europe Asia Pacific

Source: Company data

The company has a strong market position in five verticals, including government, CGI has expertise across
manufacturing retail and distribution (a vertical that has grown in particular with the Logica five verticals.
acquisition), financial services, telecom & utilities and health care.

CGI Group (GIBa.TO) 45


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Exhibit 77: Revenue Split by Vertical

Telecommunications &
Utilities Health
16% 8%

Government
32%
Financial Services
18%

Manufacturing,
Retail & Distribution
26%

Government Manufacturing, Retail & Distribution Financial Services Telecommunications & Utilities Health

Source: Company data

CGI competes against larger companies such as IBM, HP and Fujitsu that can combine CGI competes against a
Hardware and Software solutions, as well as large diversified IT service companies such range of global, regional and
as Accenture, Capgemini and CSC. Within the Federal IT service sector it competes with Indian based IT service
both large and small competitors Booz Allen Hamilton, CACI, and SAIC. Finally, CGI also firms.
competes against Indian It service firms, which are increasingly shifting their efforts to
provide more localized and high-value services.
CGI has a number of proprietary business solutions to help its market positions, including
Momentum, an ERP suite used by the U.S. federal Government, CGI Advantage, a
leading State and local ERP system, and strong credit service solutions for both
Government and businesses, including Collections360.

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Appendix B: Balance Sheet & Cash


Flow Forecasts
Exhibit 78: Balance Sheet Forecasts
(YE Sep, K CAD) 2012 2013 2014E 2015E 2016E 2017E
Current Assets
Cash and Equivalents 113,103 106,199 133,436 133,436 1,275,838 2,453,319
Short-term Investments 14,459 69 316 316 316 316
Accounts Receivable 1,446,149 1,205,625 1,373,687 1,418,674 1,465,696 1,505,604
Work-in-progress 744,482 911,848 1,003,307 984,450 999,102 1,026,465
Prepaid expenses and other current assets 244,805 219,721 230,474 230,474 230,474 230,474
Income Taxes 24,650 17,233 4,699 4,699 4,699 4,699
Total Current assets before funds held for clients 2,587,648 2,460,695 2,745,919 2,772,049 3,976,125 5,220,877
Funds held for clients 202,407 222,469 244,677 244,677 244,677 244,677
Total Current Assets 2,790,055 2,683,164 2,990,596 3,016,726 4,220,802 5,465,554
Property, Plant and Equipment 500,995 475,143 479,750 463,924 447,663 430,974
Contract Costs 167,742 140,472 146,367 143,910 141,390 138,810
Intangible Assets 858,892 708,165 648,807 556,601 461,785 364,402
Other-long-term assets 96,351 110,321 143,512 143,512 143,512 143,512
Deferred tax assets 219,590 368,217 373,571 359,953 345,765 331,150
Goodwill 5,819,817 6,393,790 6,849,314 6,849,314 6,849,314 6,849,314
Total Assets 10,453,442 10,879,272 11,631,917 11,533,940 12,610,232 13,723,715
Current Liabilities
Accounts Payable and accrued liabilities 1,156,737 1,125,916 1,238,944 1,226,968 1,209,739 1,216,310
Accrued compensation 539,779 713,933 737,384 758,920 780,723 802,105
Deferred revenue 443,596 508,267 573,926 523,750 504,999 461,110
Income taxes 177,030 156,358 180,660 180,660 180,660 180,660
Provisions 160,625 223,074 83,170 63,170 63,170 63,170
Current portion of long-term debt 52,347 534,173 558,534 558,534 558,534 558,534
Total Current liabilities before clients' funds obligations 2,530,114 3,261,721 3,372,617 3,312,002 3,297,825 3,281,889
Clients' funds obligations 197,986 220,279 241,140 241,140 241,140 241,140
Total Current liabilities after clients' funds obligations 2,728,100 3,482,000 3,613,757 3,553,142 3,538,965 3,523,029

Deferred tax liabilties 171,130 155,329 142,313 142,313 142,313 142,313


Long-term provisions 216,507 109,011 104,624 104,624 104,624 104,624
Long-term debt 3,196,061 2,332,377 1,786,725 700,030 700,030 700,030
Retirement benefit obligations 118,078 153,095 154,403 154,403 154,403 154,403
Other long-term liabilities 601,232 591,763 677,096 677,096 677,096 677,096
Total Liabilities 7,031,108 6,823,575 6,478,918 5,331,608 5,317,430 5,301,495
- - - - - -
Equity
Retained earnings 1,113,225 1,551,956 2,382,254 3,426,146 4,513,271 5,633,079
Accumulated other comprehensive income (275) 121,855 425,579 425,579 425,579 425,579
Capital Stock 2,201,694 2,240,494 2,195,918 2,201,358 2,204,702 2,214,314
Contributed Surplus 107,690 141,392 149,249 149,249 149,249 149,249
Total Equity 3,422,334 4,055,697 5,153,000 6,202,332 7,292,801 8,422,220

Total Liabilities and Equity 10,453,442 10,879,272 11,631,917 11,533,940 12,610,232 13,723,715

Source: Company data, Credit Suisse estimates

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Exhibit 79: Cash Flow Statements


(YE Sep, K CAD) 2012 2013 2014E 2015E 2016E 2017E
Operating Activities
Net Earnings 131,529 455,820 868,208 1,007,705 1,049,897 1,081,560
Adjustments for:
Amortization and depreciation 231,398 435,944 455,711 448,745 461,485 474,013
Deferred Income taxes (22,306) 34,714 (1,573) 13,618 14,188 14,616
Foreign exchange loss (gain) 158 (4,938) 3,259 - - -
Share-based payment costs 12,520 31,273 34,398 36,188 37,228 38,247
Gain on sale of investment in joint venture (2,981) - - - - -
Share of profit on joint venture (3,996) - - - - -
Other 83,632 - (62,000) (20,000) - -
Dividend received from joint venture 7,350 - - - - -
Net change in non-cash working capital items 175,958 (281,556) (219,583) (66,745) (75,852) (83,206)
Cash provided by Operating Activities 613,262 671,257 1,078,421 1,419,510 1,486,946 1,525,230
Investing Activities
Net change in short-term investments (5,203) 11,843 (236) - - -
Acquisitions (2,741,941) (5,140) - - - -
Proceeds from sale of investment in joint venture 26,000 - - - - -
Proceeds from sale of business 4,583 - - - - -
Purchase of property, plant and equipment (64,555) (141,965) (171,334) (163,672) (168,333) (172,916)
Additions to contract costs (25,325) (31,207) (76,568) (87,292) (89,778) (92,222)
Additions to intangible assets (43,658) (71,447) (79,823) (87,292) (89,778) (92,222)
Net change in other long-term assets (2,208) (10,518) - - - -
Net change in long-term investments (976) 6,402 (8,361) - - -
Payment received from long-term receivable 4,249 8,177 3,634 - - -
Cash used in investing activities -2,849,034 -233,855 -332,689 -338,255 -347,888 -357,361

Financing Activities

Net change in credit facilities (158,618) (467,027) (605,872) (1,086,695) - -


Increase of long-term debt 2,416,781 80,333 37,017 - - -
Repayment of long-term debt (904,000) (68,057) (30,833) - - -
Purchase of Class A subordinate shares held in trust (14,252) (7,663) (23,016) - - -
Sale of Class a subrodinate shares held in a trust 1,171 - 1,390 - - -
Repurchase of Class A surbordinate shares (102,845) (22,869) (127,068) (34,560) (46,656) (50,388)
Issuance of Class A subordinate shares 1,047,243 39,312 42,409 40,000 50,000 60,000
Other - - - - - -
Cash used in financing activities 2,285,480 (445,971) (705,973) (1,081,255) 3,344 9,612

Effect of Foreign Exchange 2,722 1,665 (12,522) - - -


Net Increase in cash and equivalents 52,430 (6,904) 27,237 - 1,142,402 1,177,481
Cash and equivalents, beginning of period 60,673 113,103 106,199 133,436 133,436 1,275,838
Cash and equivalents, end of period 113,103 106,199 133,436 133,436 1,275,838 2,453,319

Source: Company data, Credit Suisse estimates

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Appendix C: Management and


Board of Directors
Exhibit 80: Management and Board of Directors Summary
Name Position History
Serge Godin Founder and Executive Mr. Godin founded CGI in 1976 and was President and Chief
Chairman of the Board Executive Officer (CEO) until 2006, when he became Executive
Chairman of the Board. Mr. Godin has a background in
computer sciences and an MBA from Laval University in
Quebec City.
André Imbeau Founder, Vice-Chairman of Mr. Imbeau co-founded CGI in 1976 and was CFO of the
Board and Corporate company from 1983 to 2006.
Secretary
Michael E. Roach President and Chief Executive Mr. Roach was appointed to the role of President and CEO in
Officer (CEO) 2006, previously he had served as President and Chief
Operating Officer since 2002. Prior to joining CGI, Mr. Roach
was President and CEO with Bell Sygma Inc, which was acquired
by CGI in 1998.
R. David Anderson Executive Vice-President and Mr. Anderson joined CGI in 1998 and prior to becoming CFO he
Chief Financial Officer (CFO) was Corporate Controller. Previously, Mr. Anderson was CFO of
(Retired) Bell Sygma Inc. On July 9, 2014 it was announced that He
would be retiring. He will be succeeded by Francois Boulanger

Francois Boulanger Executive Vice-President and Mr. Boulanger was appointed as the successor to R. David
Chief Financial Officer (CFO) Anderson on July 9, 2014. He previously was Senior Vice-
(Current) president and Corporate Controller since 2006.

Jame Cofran Senior Vice-President and Mr. Cofran was appointed CMO in May, 2012 after serving as
Chief Marketing Officer Global Marketing Lead for the Financial Services industry since
2009. Mr. Cofran previously worked at American Management
Systems, Inc. (AMS), where we working in various management
and consulting positions.

Benoit Dubé Executive Vice-President and Prior to joining CGI, Mr. Dubé was head of the legal
Chief Legal Officer (CLO) department at Cognicase Inc., which was acquired by CGI in
2003. Mr. Dubé was previously an associate at McCarthy
Tétrault LLP and acted as legal counsel for BCE and Canadian
Bankers Association.
Source: Company data, Credit Suisse

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Appendix D: Compensation &


Governance
Compensation
Management seeks to align employee values with shareholders, as 85% of employees are Management is
also shareholders. Performance is based on both revenue growth and profitability (as compensated based on both
defined by net earnings margin). CGI operates a decentralized P&L model, with strong revenue growth and net
accountability in each region. Toward that end, Presidents of Strategic Business Units margins.
have one-half their compensation based on corporate performance and one-half based on
the performance of the business units for which they are responsible using the same
performance measures.

Governance
CGI's authorized share capital consists of an unlimited number of Class A subordinate A number of governance
voting shares carrying one vote per share and an unlimited number of Class B shares rules apply to CGI's duel
(carrying ten votes per share, of which, as of December 13, 2013, 276,014,110 Class A share structure.
subordinate voting shares and 33,272,767 Class B shares, were issued and outstanding.
As of December 13, 2013, 45.3% and 54.7% of the aggregate voting rights are attached to
the outstanding Class A subordinate voting shares and Class B shares, respectively.
If a take-over bid, other than an exempt bid, for the Class B shares is made to the holders
of the Class B shares without being made simultaneously on the same terms and
conditions to the holders of Class A subordinate voting shares, each Class A subordinate
voting share shall become convertible into one Class B share.
Each Class B share may, from time to time, at the holder's option be converted into one
Class A subordinate voting share. The Company's articles of incorporation also provide for
pre-emptive rights in favor of holders of Class B shares.

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Appendix E: Peers Map


Exhibit 81: Credit Suisse Peers Map

Source: Peers, Company data, Credit Suisse estimates

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Companies Mentioned (Price as of 09-Jul-2014)


Accenture Plc (ACN.N, $80.64)
Atos (ATOS.PA, €59.38)
BCE Inc. (BCE.TO, C$48.28)
BlackBerry (BBRY.OQ, $11.4)
Booz Allen Hamilton Holding (BAH.N, $21.02)
CACI International, Inc. (CACI.N, $69.31)
CGI Group (GIBa.TO, C$38.02, OUTPERFORM, TP C$48.0)
CMG (CMG.TO, C$14.7)
Capgemini (CAPP.PA, €53.41)
Celestica (CLS.TO, C$13.26)
Cognizant Technology Solutions Corp. (CTSH.OQ, $50.37)
Computer Sciences Corp. (CSC.N, $63.3)
Constel Software (CSU.TO, C$265.29)
HCL Techno (HCLT.NS, Rs1473.2)
Hewlett Packard (HPQ.N, $33.65)
Infosys (INFY.NS, Rs3310.35)
International Business Machines Corp. (IBM.N, $188.42)
ManTech International Corp. (MANT.OQ, $29.26)
McMillan Shakespeare (MMS.AX, A$9.35)
Open Text Corporation (OTEX.OQ, $48.32)
Sapient (SAPE.OQ, $15.73)
Science App (SAIC.N, $43.99)
Tata Consultancy Services (TCS.BO, Rs2397.3)
Wipro Ltd (WIPR.NS, Rs545.3)

Disclosure Appendix
Important Global Disclosures
I, Colin Moore, CFA, certify that (1) the views expressed in this report accurately reflect my personal views about all of the subject companies and
securities and (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in
this report.
The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's
total revenues, a portion of which are generated by Credit Suisse's investment banking activities

As of December 10, 2012 Analysts’ stock rating are defined as follows:


Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark*over the next 12 months.
Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months.
Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months.
*Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which
consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractiv e, Neutrals the less attractive, and
Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ra tings are based on a stock’s total
return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the
most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin Ame rican and non-Japan Asia stocks, ratings
are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; prior to 2nd October 2012 U.S. and Canadian
ratings were based on (1) a stock’s absolute total return potential to its current shar e price and (2) the relative attractiveness of a stock’s total return potential within
an analyst’s coverage universe. For Australian and New Zealand stocks, 12-month rolling yield is incorporated in the absolute total return calculation and a 15% and
a 7.5% threshold replace the 10-15% level in the Outperform and Underperform stock rating definitions, respectively. The 15% and 7.5% thresholds replace the +10-
15% and -10-15% levels in the Neutral stock rating definition, respectively. Prior to 10th December 2012, Japanese ratings were based on a stock’s total return
relative to the average total return of the relevant country or regional benchmark.
Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications,
including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other
circumstances.

Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24
months or the analyst expects significant volatility going forward.

Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or
valuation of the sector* relative to the group’s historic fundamentals and/or valuation:
Overweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is favorable over the next 12 months.
Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months.
Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months.
*An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cover m ultiple sectors.

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Credit Suisse's distribution of stock ratings (and banking clients) is:

Global Ratings Distribution


Rating Versus universe (%) Of which banking clients (%)
Outperform/Buy* 45% (54% banking clients)
Neutral/Hold* 40% (49% banking clients)
Underperform/Sell* 13% (48% banking clients)
Restricted 3%
*For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, and Underperform most closely
correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to
definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdings, an d other individual factors.

Credit Suisse’s policy is to update research reports as it deems appropriate, based on developments with the subject company, the sector or the
market that may have a material impact on the research views or opinions stated herein.
Credit Suisse's policy is only to publish investment research that is impartial, independent, clear, fair and not misleading. For more detail please refer
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Credit Suisse does not provide any tax advice. Any statement herein regarding any US federal tax is not intended or written to be used, and cannot
be used, by any taxpayer for the purposes of avoiding any penalties.

Price Target: (12 months) for CGI Group (GIBa.TO)


Method: Our $48 target price for CGI Group is based on a DCF (discounted cash flow) model that assumes a WACC (weighted average cost of
capital) of 8.5% and terminal growth rate of 1%.
Risk: Risks that could impede achievement of our $48 target price for CGI Group include the following: 1) The risk of lower IT service demand;
2) Competitive pricing pressures on bids that could impact future margins or revenue growth; 3) Lack of execution on existing contracts
that could impact financials or stock sentiment; 4) M&A activity that is dilutive to earnings, and; 5) Negative non-cash working capital
changes that does not improve as expected.

Please refer to the firm's disclosure website at https://rave.credit-suisse.com/disclosures for the definitions of abbreviations typically used in the
target price method and risk sections.
See the Companies Mentioned section for full company names
The subject company (ACN.N, BAH.N, CACI.N, CTSH.OQ, HPQ.N, CAPP.PA, TCS.BO, IBM.N, MMS.AX, OTEX.OQ) currently is, or was during the
12-month period preceding the date of distribution of this report, a client of Credit Suisse.
Credit Suisse provided investment banking services to the subject company (ACN.N, BAH.N, CTSH.OQ, HPQ.N, IBM.N) within the past 12 months.
Credit Suisse provided non-investment banking services to the subject company (CTSH.OQ, HPQ.N, CAPP.PA, TCS.BO, IBM.N) within the past 12
months
Credit Suisse has managed or co-managed a public offering of securities for the subject company (HPQ.N, IBM.N) within the past 12 months.
Credit Suisse has received investment banking related compensation from the subject company (ACN.N, BAH.N, CTSH.OQ, HPQ.N, IBM.N) within
the past 12 months
Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (GIBa.TO, ACN.N, BAH.N,
CACI.N, CTSH.OQ, HPQ.N, CAPP.PA, TCS.BO, ATOS.PA, IBM.N, MANT.OQ, MMS.AX, OTEX.OQ) within the next 3 months.
Credit Suisse has received compensation for products and services other than investment banking services from the subject company (CTSH.OQ,
HPQ.N, CAPP.PA, TCS.BO, IBM.N) within the past 12 months
As of the date of this report, Credit Suisse makes a market in the following subject companies (ACN.N, BAH.N, CACI.N, CTSH.OQ, HPQ.N, IBM.N,
MANT.OQ, OTEX.OQ, BBRY.OQ).
As of the end of the preceding month, Credit Suisse beneficially own 1% or more of a class of common equity securities of (CAPP.PA, ATOS.PA).

For other important disclosures concerning companies featured in this report, including price charts, please visit the website at https://rave.credit-
suisse.com/disclosures or call +1 (877) 291-2683.

Important Regional Disclosures


Singapore recipients should contact Credit Suisse AG, Singapore Branch for any matters arising from this research report.
The analyst(s) involved in the preparation of this report have not visited the material operations of the subject company (GIBa.TO, ACN.N, BAH.N,
CACI.N, CTSH.OQ, HPQ.N, CAPP.PA, TCS.BO, ATOS.PA, IBM.N, MANT.OQ, MMS.AX, OTEX.OQ, BBRY.OQ, BCE.TO) within the past 12 months

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Restrictions on certain Canadian securities are indicated by the following abbreviations: NVS--Non-Voting shares; RVS--Restricted Voting Shares;
SVS--Subordinate Voting Shares.
Individuals receiving this report from a Canadian investment dealer that is not affiliated with Credit Suisse should be advised that this report may not
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For Credit Suisse Securities (Canada), Inc.'s policies and procedures regarding the dissemination of equity research, please visit
http://www.csfb.com/legal_terms/canada_research_policy.shtml.
The following disclosed European company/ies have estimates that comply with IFRS: (CAPP.PA, ATOS.PA).
An analyst involved in the preparation of this report received third party benefits in connection with this research report from the subject company
(HPQ.N)
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Credit Suisse Securities (Canada), Inc. ............................................................................................................... Colin Moore, CFA ; Robert Peters

For Credit Suisse disclosure information on other companies mentioned in this report, please visit the website at https://rave.credit-
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