Believing its valuation has “never been as attractive,” Scotia Capital analyst Konark Gupta raised his recommendation for Cargojet Inc. to “sector outperform” from “sector perform” on Monday.
“CJT is trading at just under 7 times EV/NTM EBITDA [enterprise value to next 12-month earnings before interest, taxes, depreciation and amortization] as the market is growing concerned about a potential downturn due to high inflation while the company is going to spend $1-billion in growth capex over the next four years (70-per-cent backstopped by disclosed contracts),” he said. “Since winning the transformational Canada Post contract in early 2014, CJT has traded at an average multiple of 10.5 times (7.5-times to 16.5 times range). Prior to the effects of COVID-19, it was trading at more than 14 times in February 2020.
“While we appreciate the macro uncertainty and its impact on equity valuations, we believe a 7-times multiple for a highly defensive business in a structurally stronger industry is an attractive entry point for even risk-off investors and a deep bargain for long-term investors.”
Mr. Gupta said he’s “confident” that the Mississauga-based company has “an inherent ability to largely mitigate the impact of a recession or stagflation through long-term contracts (including the latest DHL contract) while the air cargo market is still well under-supplied.”
With that view, he touted its “unique” business model that “provides immunity,” noting: “The majority of CJT’s business is under long-term contracts with minimum guarantees (similar to take-or-pay), fixed pricing with CPI-linked escalators, and surcharges for uncontrollable costs (including fuel). Of the three segments, 25 per cent of Domestic and almost 100 per cent of All-in Charter revenues are not contracted, although spot demand is exceeding supply in those segments such that CJT is turning away volumes. ACMI [Aircraft, Crew, Maintenance and Insurance] revenue is contracted and poised to witness solid growth from the new seven-year deal with DHL, effective Q2/22, that is first-of-its-kind in the industry. CJT expects the contract to generate $2.3-billion in cumulative revenue over seven years ($330-million per year on average), expanding the current DHL revenue run-rate of likely $120-$160-million. We note DHL has committed to utilize nine of CJT’s upcoming ~20 aircraft as seven aircraft are going to domestic and spares, leaving four B777s (delivering in 2024-26) for future visible opportunities. As management has stated in the past, it has an ability to lease out aircraft, divest conversion slots, sell feedstock or freighters, downgauge aircraft, consolidate routes, or align costs if demand falters. However, it believes a potential downturn will first bring demand-supply in balance.”
Despite his bullish view, Mr. Gupta trimmed his EBITDA forecast, largely for 2022 and 2023, to “‘reflect a potential soft landing, which may not materially impact CJT.” That led him to trim his target for Cargojet shares to $190 from $197. The average target is $233.17.