Cargojet Inc.
(CJT-T) C$153.59
Q1/22; Cargojet Benefits from Supply Chain Woes & Strategy Event
Cargojet announced Q1/22 results on May 2. Adjusted EBITDA was $83.0 million ($79.8 million excluding gain on swap), compared with TD/consensus of $65.0 million/$74.8 million.
Impact: POSITIVE
We are maintaining our BUY recommendation and increasing our target price to $225.00 from $210.00. Our increased target price reflects the impact of higher valuation-period forecast Adjusted EBITDA, the shift forward of our valuation period by one quarter, a higher DCF value, and lower valuation-period forecast net debt. We are increasing our Adjusted EBITDA forecasts due to the carry-forward of a portion of the stronger-than-forecast Q1/22 results, which includes higher forecast ACMI and all-in charter revenue.
We believe that Cargojet's stronger-than-expected revenue, Adjusted EBITDA, and FCF highlight the strong market fundamentals for dedicated air-cargo companies. It is driven by the challenges facing ground and maritime-based freight transportation modes, e-commerce demand, and Cargojet's ability to capitalize on growth opportunities through its aggressive fleet expansion plans. We believe that a significant portion of Cargojet's Domestic and ACMI volume is based on contract pricing that offers good protection against what we view as the inevitable downside risk to spot air charter rates.
Despite the risk related to returning commercial passenger aircraft belly capacity, Cargojet's business has many offsetting drivers. E-commerce penetration (positive for air cargo demand) relative to retail sales in Canada remains behind other developed economies. Management's sourcing of Boeing 757, 767, and eventually 777 freighters provides the company with the capacity to capitalize on an environment in which demand for dedicated air cargo is expected to remain above supply for the foreseeable future. The recently announced agreement with DHL, whereby Cargojet will deploy a significant portion of its pending deliveries for the provision of up to $2.3 billion in services to DHL over a seven-year period further de- risks its revenue outlook.
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.