Our view: Following successive quarters of strong operating results for CJT, investors remain cautious around the long-term supply situation for air cargo when passenger aircraft return. New disclosure from CJT at our conference however suggests the company is trending toward new ACMI contracts for aircraft yet to be delivered, which in our view substantially improves the long-term capacity risk (and resulted in upward earnings revisions). We expect this will be well-received by the market, and we flag CJT as one of our top names in Transportation.
Key points:
Prevailing view. Clearly CJT has benefited from rising eCommerce sales, with 2021E revenue up 44% vs 2019 and EBITDA up 79%. The prevailing view however is that this will moderate when belly capacity in passenger aircraft returns, and that CJT's recent purchase of 10 aircraft brings on undue capacity risk. As a result, the shares have languished.
The emerging trend. New data suggest however that this risk is overblown —and that a systemic shift in the global supply chain for dedicated (i.e. not belly capacity) air freight is emerging:
• Addicted to the service. Dedicated air freight provides a high level of reliability not offered by belly capacity. Customers have grown accustomed to that (esp. for high valued goods) and a return to passenger belly capacity will be a challenge.
• DHL / Atlas agreement. Reflective of the above, DHL announced they will no longer be using belly capacity and recently entered into a new agreement with Atlas for significantly higher ACMI capacity.
• FedEx: FedEx issued a profit warning, pointing to supply chain disruption and network challenges. We believe this disruption will remain in place for some time, and more companies like FedEx will look to lock in dedicated air freight capacity wherever it is available.
New disclosure from CJT supports the trend. Reflecting the trends above, mgmt provided new disclosure at our conference that ACMI demand is high and that it is likely these aircraft will be contracted out prior even to their delivery. We had not expected this level of ACMI revenue this soon (our numbers go up as a result—see page 5). More importantly, this confirms in our view the favourable trends we highlighted above and addresses the long-term risk factors that have been negatively affecting the stock.
Valuation. We value CJT off a 2025 base year and discount back in deriving our 1-yr target. While we had always factored in revenue from the incoming aircraft, we did not expect it to come in as quickly and given it addresses a key long-term concern, we believe it will be a significant near-term catalyst for the stock. Accordingly, we recommend (with high conviction) the shares at current levels - and reiterate CJT as a Transportation top idea.