Q2/21 Cargo Transportation Preview TD Investment Conclusion
Our cargo transportation coverage group begins reporting Q2/21 results after market close on July 26. Our forecasts are relatively in-line with consensus for the quarter, although we believe that the strong demand and pricing environment could lead to upside surprises. We have updated fuel price, FX, and GDP assumptions, the net impact of which is generally immaterial to 2021-2023 forecasts. We have also updated certain company specific assumptions, the impact of which contributes to our TFI target increasing to $140 from $135 and our target for Andlauer Healthcare Group (AHG) increasing to $44.00 from $43.00. Our Cargojet target remains unchanged at $230.00. We have BUY recommendations on TFI and Cargojet, and a HOLD on AHG. While recent strength in TFI's share price has reduced the return to our target, we believe that it is prudent to evaluate the Q2/21 results on July 26 before contemplating any changes to our recommendation or target price.
Andlauer Healthcare's Q2 growth reflects a full quarter of contribution from the Skelton acquisition, broader industry stability, the same company-specific factors that contributed to revenue growth in Q1/21 (new Brampton facility in mid-2020, Q4/20 acquisitions), and some benefit from COVID-19 vaccine related revenue in certain markets. Organic growth is forecast to be 22% y/y in Q2/21, compared to 4.7% in Q1/21 and 5.9% in Q4/20. We believe that AHG's margin and capital efficiency, FCF strength, and exposure to an economically resilient industry are positive investment attributes.
TFI's Q2 results are expected to continue benefitting from the strong demand for freight transportation, particularly from the growth in of B2C e-commerce-driven volume resulting from the pandemic. Although this has been accompanied by B2B- related LTL volume pressure, we believe that the company overall is seeing a significant benefit that is expected to continue in coming quarters. Industry volume and pricing indicators show continued strength in Q2/21, with volume and spot rates up 25-30+%. Although it takes time for spot rates to be reflected in contract rates, we believe that this will gradually benefit TFI's revenue and margin over the remainder of 2021 and potentially into 2022.
Cargojet's Q2 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. Growth is expected to be temporarily negative in Q2 due to a very challenging prior year comp in charter resulting from the the emergency charter operations for PPE at the onset of the pandemic