Q4/21 Cargo Transportation Preview TD Investment Conclusion
Our cargo transportation coverage group will start reporting Q4/21 results on February 7. Our forecasts are relatively in line with consensus. We believe that the risk of earnings surprises is higher than normal due to the potential impact of labour shortages, pandemic-driven inefficiencies, and an unprecedented pricing environment, all of which are beyond normal cyclical influences, making the impact difficult to estimate.
We have updated our fuel-price and currency assumptions, along with industry- specific data and related forecast implications, the net impact of which is generally immaterial to our 2021-2023 forecasts. Our Andlauer Healthcare Group (AHG), Cargojet, and TFI target prices remain unchanged (Exhibit 2). Our BUY recommendation on Cargojet is unchanged, as is our HOLD recommendation on AHG and TFI. Although recent weakness in TFI's share price has increased the return to our target, we believe that it is prudent to wait until we can review results and make any necessary revisions to our financial forecasts before considering any changes to our recommendation.
AHG's Q4/21 growth is expected to reflect the acquisition of Skelton Canada in Q1/21 and a two-month contribution from the acquisition of the remaining portion of Skelton USA and the Boyle Transportation acquisition. We forecast 8% y/y organic growth that will be driven by both segments. Margins are forecast to increase slightly y/y due to a greater portion of revenue from the higher-margin Specialized Transportation segment. Despite our HOLD recommendation, we believe that AHG's margin and capital efficiency, FCF, and exposure to an economically resilient industry are investment attributes that support long-term upside potential for its share price.
Cargojet's Q4/21 results are expected to reflect strong volume due to a lack of belly capacity on wide-body passenger aircraft, continued strong e-commerce demand, supply disruptions/challenges in other forms of freight transportation, and a gradual recovery in economic growth. We expect that labour cost inflation, the impact of higher fuel prices (and the corresponding surcharges), and the unusually strong margin in Q4/20 will lead to a modest y/y decline in adjusted EBITDA margin to a still strong 37%. We believe that investors should focus on the company's capacity expansion plans and associated opportunities, and how future industry capacity growth and the potential for a less favourable pricing environment factor into those plans.
TFI's Q4/21 results are expected to continue benefitting from the strong pricing environment that is resulting from the tightness in industry capacity. Volume and pricing indicators showed continued strength in Q4/21, with volume up modestly y/ y and spot rates up 15-25%. Despite our expectation of moderating industry pricing, we believe that the scale of TFI's operations, its willingness to shed unprofitable business, and its track record of acquiring and integrating new businesses will help the company overcome these challenges.