CIBCHave a $196.00 target. GLTA
EQUITY RESEARCH
January 22, 2023 Flash Research
CARGOJET INC.
Key Takeaways From Whistler Conference: Uniquely Positioned
In A Softer Freight Economy
CJT presented at the CIBC 26th Annual Western Institutional Investor
Conference, and we had the pleasure of hosting Scott Calver (CFO). Below
are the key takeaways from our fireside chat:
Peak Season Slightly Affected By December; January Trends Back On
Track With Flight Hours Flat Y/Y: CJT provided an update on its peak
season trends noting October and November were on par with expectations
and saw volume trends similar to 2018/2019 levels. Recall, CJT had
indicated it expected Q4 to reflect a “controlled peak” season. December
trends did soften though given the extreme winter weather conditions and
weaker-than-expected consumer spending. However, on a positive note,
volume trends in January are better than December and look more similar to
the first part of Q4/22 (i.e., October/November). While concerns over a
looming recession have created a more uncertain outlook for freight volumes,
January’s flight activity month to date is constructive. According to Radarbox,
CJT’s flight activity is flat Y/Y as of January 18. While CJT is maintaining a
more cautious tone as we enter into 2023 to reflect the current economic
uncertainty, we continue to view the long-term earnings growth opportunity
as intact, especially when considering its recent contract extensions. We
have seen CJT’s key customers extend their contracts the last few months
(Canada Post, UPS, TFII, and AND), reflecting the stickiness of its key
customers. Combined with the strategic agreements with Amazon and DHL,
this gives CJT a good amount of long-term visibility.
Capable Of Managing Through A Softer Freight Economy: While January
trends are faring better than December, CJT is cognizant of the uncertain
macroeconomic conditions looking out into 2023. The company, however, is
capable of managing through this given: 1) CJT is actively managing its
variable expenses. The company incurred one-time expenses necessary to
ramp-up capacity during 2022 which includes training costs, overtime costs,
and contract positions. When volumes moderate though, the company can
manage these variable expenses to maintain margins per block hour. 2) All
of CJT’s contracts have pricing escalators and surcharge programs to protect
against inflation. 3) Customer contracts have minimum guarantees. CJT’s
domestic contracts have minimum guarantees based on the number of
containers per plane and ACMI contracts have minimum block hours per
plane per month. This provides some level downside protection in the event
we do have a mild recession. 4) In terms of flexibility around its capex, the
current fleet plan is underwritten by its long-term contract with DHL and
supported by the recent contract extensions. CJT’s major customer contracts
have now extended into the late 2020s. That said, CJT has the ability to
defer up to $300MM capex, if need be, to protect its balance shee
Benefits Of Diversification Strategy: CJT reiterated the benefits of its diversifying strategy:
1) ACMI revenue carries higher margins because the company owns the planes and charges a fixed rate per block hour for a minimum number of block hours per month, while customers are responsible for other variable costs. The ACMI contracts don’t have the same overhead costs as domestic business and thus provide good downside protection and earnings visibility. In other words, CJT is able to leverage the overhead from its domestic operations as it expands its ACMI business, resulting in better fixed cost absorption. 2) Diversifying into ACMI is complimentary to the company’s domestic network and charter operations as all the planes brought on are available to be deployed across the network. CJT can now originate cargo from an international destination under an ACMI contract and bring those volumes into
its domestic network. In the past, that international cargo may have used belly capacity. Net- net, the diversification into ACMI and charter is complimentary to CJT’s domestic operations and leverages its existing network, and is accretive to margins. For example, CJT saw strong charter operations in Q4, which should help offset some of the weakness in December.