Cargojet Inc.
(CJT-T) C$132.80
Q3/22; ACMI & Contracts Provide Strong Footing for 2023 Event
Cargojet announced Q3/22 Adjusted EBITDA of $82.1 million, compared with TD/ consensus of $86.6 million/$84.7 million.
Impact: NEUTRAL
We are maintaining our BUY recommendation and $195.00 target price. Our unchanged target price reflects the net impact of slightly higher valuation-period Adjusted EBITDA and the shift forward of our valuation period by one quarter, offset by changes in our DCF. The higher valuation-period Adjusted EBITDA is primarily due to the carry-forward of a portion of the stronger-than-expected Q3/22 results, higher valuation-period Domestic and ACMI revenue, and other minor modelling updates.
Cargojet reported stronger-than-expected Adjusted EPS in Q3/22, but slightly lower- than-expected revenue and Adjusted EBITDA. Cargojet's revenue increased 23% y/ y, adjusted EBITDA 16% y/y, and adjusted EPS by 40%. Although we anticipate that growth will slow in 2023, this should not be surprising to investors, and we believe that investors should look past a period of slowing growth and focus on the valuation implied by the EBITDA potential of the business in 2023 and 2024. Management highlighted opportunities to defer deliveries and capital expenditures, reduce costs, and benefit from the contractual growth in its DHL ACMI agreement. Although we do not currently believe that aggressive actions on cost levers will be necessary in 2023, we believe that investors should be reassured by their existence, and that combined with the DHL agreement, should limit potential margin pressure in 2023.
Cargojet is trading in line with its most attractive valuation in almost 10 years, despite the significant progress the company has made in establishing itself within the Canadian market, building an extremely valuable relationship with DHL, expanding its opportunities for sustainable global growth, and demonstrating capital discipline. Although we acknowledge that economic conditions could become more challenging through 2023, we believe that the magnitude of the recent share-price weakness is not justified and that current prices provide an excellent entry point for investors.
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.