Revised Targets Cargojet Inc.’s expanded long-term strategic relationship with DHL Express Division, an affiliate of Deutsche Post DHL Group, has “a plethora of strategic benefits locking in revenue for seven years, deepening its ties with one of its largest clients, and growing the high-margin ACMI business,” said Canaccord Genuity analyst Matthew Lee.
Under the new five-year extendable deal to provide air-transportation services for DHL Network Operations, announced Tuesday, the German company received an option to buy up to 9.5-per-cent equity stake in the Canadian firm over a period of seven years, at a price of $158.92 each, with vesting tied to the delivery of $2.3 -billion in business volume during the term.
“In our view, the seven-year length of the deal is somewhat unusual given the average length of an ACMI deal is 3-5 years,” said Mr. Lee. “We believe this reflects DHL’s confidence in cargo demand going forward and reinforces our view that long-term trends for CJT remain healthy, driven by ecommerce growth and rising long-haul, international demand.”
He also thinks the deal “largely justifies” Cargojet’s capital spending plan and gives investors clarity into the decision to significantly expand its fleet.
“Post this transaction, we expect that CJT will have only four planes within their scheduled fleet plan uncommitted, which significantly de-risks the thesis,” he said.
Maintaining a “buy” rating. Mr. Lee raised his target to $250 from $240, to reflect a “substantially elevated revenue forecast and a slightly higher multiple ... associated with improved revenue visibility.” The average is $238.25.
“We believe that the company’s improved growth trajectory (14-per-cent F21-F24 CAGR), added downside protection, and position within the industry largely justify our raised multiple,” he said.
Others making changes include:
* Scotia Capital’s Konark Gupta to $215 from $195 with a “sector perform” rating.
“We are encouraged by the long-term DHL agreement announced [Tuesday] which not only de-risks half of the $1B aircraft capex over the next five years, but also slightly improves our outlook,” he said. “In addition, it validates CJT’s strategy to invest in the larger, more expensive B777 freighters, which will commercialize for the first time in the coming years.”
* RBC’s Walter Spracklin to $302 from $311 with an “outperform” rating.
“When CJT announced its Q4 results 3 weeks ago, management disclosed a significant capex spend but at the time was not in a position to disclose the contract that prompted it. That contract has now been signed: a 5+2yr deal with DHL (incl. warrants that ensure $2.3-billion in minimum revenue). We had already assumed utilization from this capacity; but we see lower risk now with the deal in place and clear room for additional growth upside,” said Mr. Spracklin.
* TD Securities’ Tim James to $230 from $210 with a “buy” rating.
* CIBC’s Kevin Chiang to $236 from $217 with an “outperformer” rating.
* Acumen Capital’s Nick Corcoran to $295 from $300 with a “buy” rating.