CIBCEQUITY RESEARCH
June 23, 2022 Company Update
CARGOJET INC.
Management Meeting And Tour Of Hamilton Facility Reinforce
Our Positive View
Our Conclusion
We hosted an investor tour of CJT’s Hamilton Hub and had a chance to sit
down with management. With us from the company were Jamie Porteous
(Chief Strategy Officer), Scott Calver (CFO), and Sanjeev Maini (VP of
Finance). We discussed CJT’s customer relationships, growth pipeline, and
operations. The tour reinforced our positive view on CJT and it remains one
of our preferred names. We maintain our Outperformer rating and $207 price
target.
Key Points
Customer Relationships Remain Solid: There is this fear that the
expansion in dedicated air cargo capacity poses a long-term risk to CJT. We
view this as a very low risk. First, CJT’s main customer contracts extend to
2025 and so the ability for a new entrant to win over one of these customers
(i.e., Canada Post, UPS) in the near term is limited. It also takes 12 to
18 months to onboard a large account. Second, there is little incentive for
customers to find an alternative air freight partner. CJT’s operations in
Hamilton are co-located with some of its biggest customers (e.g., DHL), its
on-time performance is best in class, and its customer service is a
differentiating factor. On this last point, as an example, CJT discussed how it
worked with DHL during the early months of the pandemic to assist it in
moving freight that had been grounded as belly capacity disappeared
overnight when passenger airlines grounded their fleets. Putting this
together, we continue to see a high level of stickiness between CJT and its
main customers.
CJT’s Revenue Outlook Remains Strong: Concerns over the broader
freight market have weighed on CJT’s shares, but they fail to appreciate the
company’s unique business model. First, 80% of its domestic revenue is
committed from its main customers. Typically, the volume requirements for
these customers is ~20% higher than these minimum levels. The other ~10%
of domestic capacity is sold as “surge” capacity. Overall though, CJT has
seen no degradation in volume trends. On the ACMI side, these are also
take-or-pay-like agreements and there is long-term visibility here with the
seven-year agreement recently signed with DHL. The Charter side of the
business is arguably where CJT has more exposure to global freight trends
but this is a small percentage of the business and is tracking at above-normal
levels. Net-net, we see a high level of resiliency in CJT’s earnings model,
even if we walk into an economic slowdown. We continue to make the case
that the capacity that CJT puts into the market is below demand levels so the
company does benefit from a buffer even if overall industry volumes slow.
Valuation Is Still Compelling: We view CJT’s valuation as compelling. It is
trading at 7.5x forward EBITDA (consensus) and this has been a good floor
looking back to 2015 (when CJT onboarded the Canada Post contract).