ATB Capital Seeing price and volume trends remaining “strong,” ATB Capital Markets analyst Chris Murray said his bullish thesis on Cargojet Inc. is “very intact as valuations test [a] five-year low.”
On Monday, Mr. Murray hosted a corporate update call with the Mississauga-based company, which he said was “positive about the demand environment, which continues to outstrip capacity.” He said its executives think it is “well-positioned in the near and longer term.”
“Management reinforced that 75-80 per cent of domestic volumes remain supported by fixed-price contracts (which include volume minimums) subject to a CPI adjustment on an annual basis, with the remaining 20-25 per cent of capacity demonstrating positive pricing trends over a multi-year period,” he added. “Demand for higher-margin ACMI [Aircraft, Crew, Maintenance and Insurance] and charter services continues to exceed supply, with management noting its ability to leverage available capacity on partner aircraft (which CJT operates on an ACMI basis) as a cost-effective way to add capacity.”
“Management noted that Amazon (AMZN-Q) is looking to add additional capacity on an ACMI basis over the near term to meet growing volumes. Management confirmed that the Company will look to serve growing demand from Amazon on an all-charter basis in 2022 before potentially adding dedicated ACMI capacity in 2023.”
Mr. Murray said Cargojet management views its shares as “significantly undervalued” and intents to increase the size of its normal course issuer bid.
“We view the potential repurchases favourably given the program provides management with a flexible option to return capital to shareholders on an opportunistic basis, particularly during periods of elevated volatility,” he said. “With leverage reported to be 1.1 times at Q1/22, we see the Company maintaining the flexibility to repurchase shares while funding its capex budget through internal sources.”
Mr. Murray reiterated his “outperform” rating and $230 target for Cargojet shares. The average on the Street is $232.58.
“With significant investments being made to expand capacity over the near term, we see the Company as increasingly well-positioned to benefit from growing domestic e-commerce demand and attractive supply/demand dynamics around international air cargo services. We see prevailing valuations as very compelling, particularly given the secular tailwinds and the strength of the Company’s competitive position domestically. With weakness in the broader markets, shares of CJT now trade at 7.8 times 2022 and 7.0 times 2023 ATB estimated EV/EBITDA multiples, near five-year lows. Management xpects to hold an investor day in September, which we expect to serve as an opportunity for the Company to lay out its medium-term outlook and strategy around capital allocation.”