Our view: CJT Q4 results came in below expectations on a weaker than expected peak season. We expect macro that impacted Q4 to persist into 2023 and negatively weigh on ACMI growth rates versus our prior expectations. Key however is that management deferred / cancelled four 777s, which we view as meaningfully reducing overcapacity risk as well as pulling forward the company's FCF inflection. While macro likely to weigh on sentiment in the near-term, we view the decreased risk profile and FCF inflection pull forward as positive drivers of valuation looking ahead.
Key points:
Q4 below. CJT reported revenue at $267MM (cons $261MM) - up +13% y/y on the back of new ACMI revenue and all-in charter. Revenue (excl. fuel) was below relative to expectations due to weaker than expected ACMI revenue reflecting macro headwinds. Adj. EBITDA came in at $83MM, below our $90MM and consensus $91MM. Margins were worse than expected, at 31%, below our 35.2% on weaker peak season volume. Highlights from the release, conference call and our subsequent call back with mgmt. as follows:
• 2023 outlook muted as macro weighs on ACMI. Mgmt pointed to some ACMI headwinds in 2023 due to macro weakness expected to drive lower block hours with DHL. The ACMI outlook had the biggest delta versus our prior expectations. However, management noted that Domestic Overnight revenue was trending flat YTD (versus our prior expectation for down -5% in H1) and that they expect Domestic Overnight revenue up low-single digit in 2023 (in line with consensus expectations). Further, CJT expects to be able to open up capacity due to weaker Domestic and ACMI demand for new opportunities in all-in charter.
• CJT elects to defer / cancel four 777s, which we expect to favourably affect valuation. International airfreight rates have been declining into 2023 on the back of slowing demand and increasing capacity. We believe this was increasing risk surrounding CJT’s international expansion, and we therefore view positively the announcement today of deferral / cancellation of certain aircraft. We believe this meaningfully reduces overcapacity risk as well as pulls forward CJT's FCF conversion – both positive factors that we expect to favourably affect valuation.
Adjusting estimates for lower ACMI revenue and expected reduction in fleet. We are adjusting lower our 2023 EBITDA estimate to $335MM (from $356MM) due to weaker than expect ACMI revenue on the back of macro headwinds. We expect conditions to normalize thereafter, and note that we have CJT largely recovering by 2026. Our 2026 estimate decreases however due to a reduction in our fleet estimate – we now assume six 777s (versus eight previously). Accordingly, our 2026 EBITDA estimate decreases to $507MM (from $541MM). Our target moves to $231 (from $247); representing a ~100% implied return.