TD Q2/22 Cargo Transportation (air & road) Preview
Weakening Economic Assumptions Bias Forecasts/Targets Lower
TD Investment Conclusion
We are reducing our cargo transportation company target prices by 6-15%, primarily to reflect lower economic growth assumptions for 2023, along with other minor modelling updates. We expect all companies to report strong y/y growth in Q2/22, with in-line to slightly stronger-than-consensus earnings (Exhibit 1) for Q2/22, but believe that share-price responses will depend on signs of inflation pressure and weakening demand for the latter part of 2022 and 2023. We estimate that 2023 EBITDA will be flat-to-down 14% versus 2022, with our 2023 forecasts now comfortably below consensus for the group, with the exception of Andlauer Healthcare Group, which we believe is capable of meeting consensus due to its economic resiliency.
Cargojet is our top pick in the group, with a 43% 12-month return potential. Our 2022 and 2023 forecasts for the group do not assume any M&A contribution that has not already been completed or announced, and are based on TD Economics Canadian real GDP forecast of 3.7% in 2022 and 1.7% in 2023 (down from 3.0% previously). Although we believe that the risk is to the downside for economic assumptions, we also believe that balance-sheet strength and management motivation for acquisitions could result in TFI, Mullen, and Andlauer Healthcare Group making acquisitions which provide partially offsetting upside for our forecasts and target prices.
Cargojet is our top pick, primarily due to it having the greatest upside to our 12-month target, and also due to our view of the superior industry characteristics for dedicated air cargo companies, its capacity expansion plans, recent DHL agreement, and more significant share-price pullback relative to its 2021 highs.
Mullen Group has the second highest expected return, which, combined with its strong and, in our view, sustainable dividend yield, and remaining exposure to oil- and-gas markets make it an attractive opportunity at current levels, and one that we believe will reward investors prepared to ride out the current volatility.
We believe that TFI International is relatively well-positioned for a downturn in consumer spending and the impact on trucking markets. Its low exposure to spot- market pricing, history of earnings and FCF, focus on profitable cargo, and the remaining margin expansion opportunities from its 2021 landmark acquisition of UPS Freight will provide stronger returns once visibility into the extent of potential 2023 economic weakness improves.
Andlauer Healthcare Group has very limited exposure to a weakening economy while offering investors upside related to favourable industry trends for temperature- controlled healthcare product transportation and logistics services. The share price has outperformed during sector and overall equity market weakness, while its multiple remains (deservedly) at a notable premium, leaving less significant upside potential over 12 months, in our view.