September 20, 2022
Cargojet Inc.
FCF expected to be in focus at CJT's upcoming Investor Day
Our view: We expect CJT’s upcoming Investor Day to focus on long-term financial guidance and capex targets surrounding CJT's expanded fleet. We believe the major takeaway for investors will surround aircraft delivery trends out to 2026, and in our view the subsequent FCF inflection in conjunction with the capex decline, expected early 2026. Overall, we view the risk of overcapacity as low, and view the upcoming FCF inflection and current share price weakness as creating a meaningful investment opportunity in the shares. CJT is and remains our top transport idea.
Key points:
Investor Day. CJT will hold its Investor Day on September 27. The Investor Day will include presentations from CJT’s leadership team that we expect to focus on long-term FCF guidance out to 2026.
Investor Day to highlight upcoming FCF inflection. Key from the Investor Day in our view will be colour on long-term financial guidance out to 2026 as CJT accepts delivery of its expanded fleet. We expect mgmt to emphasize a near-term ramp in capex and subsequent FCF inflection as growth capex falls off, expected early 2026. We therefore expect mgmt to guide to FCF of >$350MM in 2026 versus consensus $366MM (RBC: $385MM) - we note that our 2026 FCF estimate represents a FCF yield of +16%. Overall, we would view a FCF guide in line with our expectations as positive to sentiment, despite being in line with consensus, as we believe highlighting these trends will help better frame and reduce uncertainty surrounding what we view as a significant upcoming FCF inflection.
Overcapacity risk overblown in our view. While overcapacity risk represents an important investor concern, we view potential overcapacity as being mitigated by supply constraints and demand tailwinds. Our view is that belly capacity will not recover as quickly (or to the same degree) as is being priced into shares at current levels reflecting higher fuel costs that we expect to reduce the propensity to travel and airlines increasingly shifting toward narrow-body aircraft and away from wide-body configuration. Turning to the demand side, we believe dedicated airfreight provides a high level of reliability not offered by belly capacity, thereby driving permanent share shift toward dedicated and away from belly. Finally, we believe overcapacity risk has been further mitigated by CJT’s agreement with DHL, which we view as favourably positioning the company long-term.
Our take. The key driver of CJT stock going forward in our view will be how it handles potential macro headwinds as it accepts delivery of its new fleet. Our view is that the DHL agreement meaningfully reduces overcapacity risk and that pricing, while expected to decrease off current levels, will remain elevated versus pre-pandemic averages. Overall, we view this dynamic as creating a significant opportunity in the shares ahead of CJT's Investor Day, and reiterate CJT as our top transportation idea.