Cargojet Inc.
(CJT-T) C$134.47
Look Through Current Industry Backdrop To Cargojet Opportunity Event
We believe that the current Cargojet share price fails to reflect the company's long term contracts with leading global providers of overnight and express services, limited exposure to spot market air freight pricing, and strong financial and operational track record.
Impact: NEUTRAL
While many investors are focused on the unsustainable level of air freight pricing that prevailed during the pandemic, the impact of easing supply side tightness and the potential for weakening economic conditions, we believe that the downside risk to Cargojet's volume and pricing is much more limited than the broader global air freight market due to its long-term contracts with UPS, Canada Post, Amazon, DHL, and others. In our view, pricing during the term of these contracts will reflect CPI escalators, the value provided by Cargojet's dedicated service offering, and, over the long-term, the changes in the cost structure of providing those services. These contracts do not begin expiring until March 2025, and some currently extend through 2029.
Please see our Bulletin dated November 28, 2022 that highlights reasons behind our view that Cargojet offers a relatively low risk investment for capitalizing on the long-term growth in air freight demand while limiting exposure to what is understandably a rather ominous outlook for short-term volume and pricing. While we assume a backdrop of global air cargo revenue that declines at an 8.7% CAGR from 2022-2025, we estimate that Cargojet will increase its Domestic network revenue at a 3.2% CAGR and its consolidated revenue at a 7.8% CAGR.
Due to our view of the limitations in using Cargojet's historical valuation as a precedent, we include a DCF value for determining our 12-month target. Our DCF combined with the value derived from applying a 10.0x multiple to forward EBITDA implies significant upside potential over 12-months.
TD Investment Conclusion
We believe that Cargojet deserves a premium valuation relative to comparables, due to the stability provided by its long-term contracts, above-average historical growth, prudent financial leverage, strong margins, and competitive position within an industry that is expected to continue benefiting from the advantages of air freight relative to other modes of transportation.