Cargojet Inc.
(CJT-T) C$111.50
Q4/22; Inevitable Slowdown in 2023 Aligns with Expectations Event
Cargojet reported Q4/22 Adjusted EBITDA of $82.9 million ($79.5 million excluding gain on swap), compared with TD/consensus of $85.8 million/$90.5 million. After normalizing certain Q4/22 expenses, we estimate that adjusted EBITDA was close to consensus and above our forecast.
Impact: SLIGHTLY NEGATIVE
We are maintaining our BUY recommendation and reducing our target price to $185.00 from $195.00. The target-price change reflects the impact of slightly lower valuation-period Adjusted EBITDA and a lower DCF value, partially offset by higher net debt. Our lower estimates are primarily due to the carry-forward of a portion of the weaker-than-expected ACMI revenue from Q4/22 and other minor modelling updates.
The company's decision to defer certain growth aircraft acquisitions confirms the weakening demand environment for dedicated air-cargo services that we believe the market has been anticipating since the latter part of 2022. A slowdown should not be surprising, given broader economic conditions and the inevitable draw-down from the unprecedented demand and pricing environment that occurred during the pandemic.
Against this backdrop, we believe that investors should be encouraged by the fact that: 1) Q4/22 (normalized) adjusted EBITDA was slightly above our expectations; 2) management indications for 2023 adjusted EBITDA are in-line to slightly ahead of our forecast (implying modest y/y growth); and 3) asset sales and capex restraint imply positive FCF and lower forecast leverage in 2023. Although the deferral of capex and cautious commentary from management may prevent an immediate move higher in the stock, we believe that the share price will move significantly higher over 12 months. Cargojet is trading in line with its most attractive valuation in almost 10 years (Exhibit 2), 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.
TD Investment Conclusion
We believe that Cargojet deserves a premium valuation relative to comparables, due to the stability of its long-term contracts, 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.