TFI International Inc T.TFII

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Q3/21 Cargo Transportation Preview

Ideal Conditions for Select Cargo Transportation Companies

TD Investment Conclusion

Our cargo transportation coverage group begins reporting Q3/21 results on October 28. Our Q3 forecasts are relatively in-line with consensus. We believe that the opportunity for upside surprises is unusually significant due to the strong demand and pricing environment. We have updated fuel price, FX, and GDP assumptions, the net impact of which is generally immaterial to 2021-2023 earnings forecasts. We have also updated certain industry and company specific assumptions, the impact of which contributes to our TFI target increasing to $165 from $155. Our Cargojet target remains unchanged at $235.00. Our BUY recommendation on Cargojet is unchanged as is our HOLD on TFI.

TFI's Q3 results are expected to continue benefitting from the strong demand for freight transportation, particularly from the growth in e-commerce-driven volume resulting from the pandemic. Industry volume and pricing indicators show continued strength in Q3/21, with volume relatively flat y/y but spot rates up 20-30% or more. We believe that the strong spot rates resulting from restricted industry supply will gradually filter into TFI's contracted rates and provide a particularly compelling backdrop against which to renegotiate uneconomic contracts. While a tight labour market, ongoing COVID-19-related disruptions, and port congestion are expected to pressure costs, we believe that the net impact of strong pricing and higher costs will be positive for TFI. We recognize the potential for TFI's share price to move higher in the short-term due to upwards earnings revisions and an industry backdrop that is well suited to its business strategy, but believe investors should temper expectations given the significant share price and multiple expansion over the past 12-months.

Cargojet's Q3 results are expected to reflect the positive industry dynamics in the air cargo sector, driven by a lack of belly capacity on wide-body aircraft, continued strong e-commerce demand, supply disruptions/challenges in other forms of freight transportation, and a gradual recovery in economic growth. With the increased ground and maritime transportation congestion, we believe that air cargo rates (up an average of approximately 40% y/y in Q3/21) will continue to provide significant opportunities for Cargojet's charter, and spot pricing based domestic network volume. We believe that the more prolonged recovery in international air travel demand implies that the return of widebody aircraft, which account for the bulk of global passenger aircraft cargo capacity, could also be delayed. Despite the opportunity for Cargojet from the drawn-out international travel recovery and Cargojet's contracted fleet expansion, we believe that the competitive environment will become more challenging and should be monitored closely due to new entrants and the long-term return of passenger aircraft belly capacity.