Cargojet Inc.
(CJT-T) C$185.03
DHL Agreement Provides Certainty for Capacity Growth Event
Yesterday morning, Cargojet announced that it has entered into a long-term strategic agreement with DHL to provide air-transportation services for DHL's global network. The agreement has an initial term of five years, with a renewal option for an additional two years.
Impact: POSITIVE
We are maintaining our BUY recommendation and increasing our target price to $230.00 from $210.00. Our increased target price reflects the impact of higher EBITDA forecasts due to the greater-than-expected revenue contribution from the five B767Fs and four B777Fs that will be used for the fulfillment of the DHL agreement. Due to our target-price methodology, the potential increase in shares outstanding related to the warrants issued under the DHL agreement has a minimal impact on our target.
We believe that the market has been concerned about Cargojet's capital-expenditure commitments and its ability to profitably fill its planned capacity growth over the next several years. Confirmation that Cargojet will dedicate five B767Fs and four B777Fs that it has committed to purchase to the DHL agreement should greatly alleviate these concerns and provide investors with confidence in the company's ability to increase earnings despite the risk related to the return of passenger aircraft belly cargo capacity and new competition over the coming years.
We believe that Cargojet's planned fleet investments will increase long-term shareholder value and the share price beyond our 12-month target horizon. The pandemic has resulted in a shift in supply-chain priorities and we believe that a well-managed pure-play air-cargo company such as Cargojet is well-positioned to benefit from this shift. We forecast 2023 (valuation period) revenue of $995.5 million, adjusted EBITDA of $367.6 million, and adjusted EBITDA margins of approximately 37%.
TD Investment Conclusion
We believe that Cargojet deserves a premium valuation relative to comparables, due to its above-average historical growth, prudent financial leverage, strong forecast margins, and competitive position within an industry that is expected to continue benefiting from a lack of cargo capacity. We believe that Cargojet's valuation multiples will benefit from growth in air-cargo demand and the lack of belly capacity on commercial passenger aircraft.