BNS Top Pick In a research report titled Growth Stock Enters Value Territory, Scotia Capital analyst Konark Gupta reaffirmed Cargojet Inc. (cjt-T) as “a top pick,” expressing “high conviction” in its growth outlook.
“CJT is down approximately 2 per cent year-to-date after losing 22 per cent in 2021 as multiple has significantly compressed to near 1 standard deviation at 10 times EV/EBITDA from 14 times pre-pandemic (peaked at 16.5 times),” he said. “Meanwhile, EBITDA run-rate has nearly doubled and net debt has declined by over 50 per cent since pre-pandemic (i.e., leverage ratio is down to 1.0 times from 4.0 times). Further, our forward estimates (as well as consensus) have been increasing since March 2021.
“As we have been pointing out over the past several months, we believe the stock is in the penalty box due to overblown concerns about potential competition and over-capacity risks , while investor focus may also have been shifting toward reopening plays (e.g., travel stocks such as airlines). However, we think the multiple is likely to re-rate this year as CJT potentially surprises with 2021 EBITDA growth, despite a very tough comp, and indicates stronger growth in 2022, perhaps announcing new contracts (besides renewals).”
Mr. Gupta “conservatively” raised his fourth-quarter EBITDA estimate by 10 per cent to $83-million, which he notes sits 5 per cent above consensus and implies a full-year EBITDA of $285-million (up 1 per cent year-over-year and 79 per cent versus 2019).
“Although 1-per-cent growth in 2021 is not material, we think the market could be surprised by positive growth given prior expectations were for a year-over-year decline due to very tough comps (transitory tailwinds in 2020 from PPE demand and surge in spot rates),” he said. “The key drivers for our Q4/21 estimate increase are stronger peak season (potential boost to e-commerce from Omicron fears), domestic volume tailwinds from flooding in B.C., potential transpacific volume upside from rapid test imports, and resurgence in spot rates. We expect growth to accelerate in each of 2022, 2023, and 2024 , supported by CJT’s addition of 13 aircraft through 2024 (9-10, net of replacement).
“While equity raise and long-term capex plans weighed on the stock last year, we expect positive catalysts this year in the form of new contract wins, which should alleviate investor concern about over-capacity . In particular, we expect CJT to announce ACMI contracts utilizing several B767 aircraft. Three B767s are entering the fleet this year, followed by another three in 2023 (some may be for replacement). In addition, CJT could potentially deploy the three upcoming B757s in domestic overnight to free up a few B767s for any incremental ACMI opportunities. Similarly, we expect CJT to announce more early contract renewals during 2022-2023 (likely Canada Post and UPS), which should alleviate investor concern about potential competition.”
Maintaining a “sector outperform” rating, Mr. Gupta trimmed his target for Cargojet shares to $240 from $245, falling below the $249 average, after adjusting his valuation to “better reflect the reopening theme.”
“Although the stock suggests that the market is lacking confidence in CJT’s ability to retain its market position due to potential competition (from Canadian airlines) and to utilize future capacity growth due to rebounding belly capacity and increasing freighter conversions, we have high conviction in our growth outlook,” he said.