In response to an 8-per-cent drop in its share price on Monday despite the release of fourth-quarter financial results that beat the Street, Scotia Capital analyst Konark Gupta raised his rating for Cargojet Inc., believing the “risk/reward has improved to a point where upside risk outweighs downside risk in the medium term while long-term outlook is strong.”
Cargojet reported revenue of $187.1-million and EBITDA of $81.9-million, exceeding the consensus estimates on the Street of $178.9-million and $79.4-million due largely to “robust” domestic and Aircraft, Crew, Maintenance and Insurance (ACMI) traffic.
“The stock had been losing steam for some time and is now down 30 per cent since the Nov. 2020 peak (down 18 per cent year-to-date),” said Mr. Gu[ta. “We believe a combination of factors could be behind this weakness, including Air Canada’s decision to enter the dedicated cargo market, risk to long-term cash flow outlook due to planned $400-million-plus multi-year growth capex without high revenue visibility, recent pressure on growth/momentum stocks, and tough growth comps this year (from Q2). While most of these risks were known heading into the quarter, we think lack of new contract disclosures or any other near-term catalyst drove the incremental weakness [Monday].”
After a “strong” end to 2020, Mr. Gupta thinks this year’s oulook is “likely negative.”
“We have reduced our revenue expectations, particularly for All-in Charter and Domestic, which together with our trimmed margin outlook implies a 14 per cent year-over-year decline in EBITDA,” he said.
“We expect a modest revenue growth in Domestic, a stronger growth in ACMI and a significant decline in All-in Charter. Concurrently, we raised our capex assumption to $250-million to reflect the timing of aircraft feedstock purchases and conversion slot deposits related to the already disclosed multi-year fleet growth plan (five B-767s and at least two B-777s), along with an increase in maintenance capex (more C-checks due to deferrals last year). We expect near break-even FCF this year.”
Moving the stock to “sector outperform” from “sector perform,” he trimmed his target to $220 from $240. The average is $256.33
“We like Cargojet for its dominant market position, high barriers to entry, and resilient business model that position the company well to significantly benefit from positive ongoing and long-term secular e-commerce trends in Canada as well as ongoing shortage of passenger aircraft belly capacity in the international markets,” he said. “Its recent strategic deal with Amazon Canada and industry’s evolving delivery model toward seven days a week could drive material increase in asset utilization and margins over time. The company has significantly reduced its financial leverage since 2019 through strong FCF generation during this pandemic and the recent equity raise, making it more attractive to equity investors.”
Elsewhere, Canaccord Genuity analyst Doug Taylor cut his target for Cargojet shares to $200 from $250 with a “hold” recommendation.
“Investors appear to be looking further into 2021 for new tailwinds as some of the more acute pandemic-related demand has cooled,” said Mr. Taylor. “While some volumes, particularly for dedicated charter, continue to subside, we believe there remain strong opportunities with additional international and ACMI routes as e-commerce is expected to remain elevated post-pandemic and demand for wet leases persist. To that end, the company is expanding its domestic and international scale with additional B767s and is in negotiations for B777s as passenger bellyhold capacity remains weak.
“While we maintain a strong growth outlook for the company as a scalable model to address these opportunities, we expect slightly lower margin capture with prices moderating on the other side of the pandemic.”
Other analysts making target price adjustments include:
* ATB Capital Markets’ Chris Murray to $225 from $275 with an “outperform” rating.
* BMO Nesbitt Burns’ Fadi Chamoun to $245 from $270 with an “outperform” rating.
* Scotia Capital’s Konark Gupta to $220 from $240 with a “sector perform” rating.
* National Bank Financial’s Cameron Doerksen to $231 from $254 with an “outperform” rating.
* CIBC World Markets’ Kevin Chiang to $245 from $265 with an “outperformer” rating.