Our view: The negative reaction following CJT's strong Q3 is likey a result of the added new capacity announced, and the trepidation around capacity once belly space in passenger aircraft returns. We highlight however that: 1) intl belly space is likely not going to recover until 2027; 2) the new aircraft adds should be timely (2022), allowing CJT to capitalize early on the strong demand; and 3) evidence suggests that customers (such as DHL) are strategically orienting themselves away from passenger belly capacity and toward dedicated freighters over the long-term; a direct benefit to CJT in our view.
Key points:
Q3 results above. Adj EBITDA of $71MM, was above our $67MM and consensus of $69MM. Key item of note was the meaningfully higher volume (+16% vs. our +10%), which was only partially offset by lower yields. Overall, a solid Q3 print setting up nicely for the seasonally strong Q4 peak.
Key factors from the conference call and our follow-up call with mgmt are as follows:
• More new aircraft secured. Mgmt announced that they were able to secure two more 757 aircraft, for a total of three that will be added to the fleet next year. These aircraft will be put into the Domestic Network, thereby freeing up three 767 aircraft to put on ACMI and/or International routes. This provides the company an attractive growth avenue should eCommerce demand remain elevated — which we believe it will.
• Growth strategy matches the opportunity with a lower risk profile. Mgmt is adopting a prudent strategy to the entry into service of new aircraft. By placing the new aircraft into ACMI, the company reduces the utilization risk of those aircraft in the early years of their operation; while providing optionality (if demand conditions warrant) to convert this business into dedicated international routes operated by CJT, allowing the company to earn higher returns.
Raising near-term estimates; no change longer term. Given that the new 757s will go into service early (2022), we are taking up our 2022E and 2023E EBITDA to reflect the new ACMI revenue. As we had already assumed a ramp up in ACMI (albeit at a later date), we are leaving our 2025 estimates unchanged. Slight changes to debt levels moves our target to $295 (from $300).
Reiterate CJT as a top idea. With continued market trepidation around the company's new aircraft additions causing downward pressure on the shares, the evidence that we have been observing suggests to us that the demand environment for dedicated freighters will remain robust, even if / when belly capacity on passenger aircraft returns. Accordingly, we see the weakness as a very attractive investment opportunity, and we reiterate CJT as a top three name in our coverage universe today.