Q1/23 Cargo Transportation (road & air) Preview
TD Investment Conclusion
Our Canadian cargo transportation group will start reporting Q1/23 results on April 27. Our Mullen Group EBITDA forecast for Q1/23 is in line with consensus, while Cargojet and AHG are slightly below consensus. We have adjusted our forecasts to reflect updated pricing and volume assumptions, along with economic, currency, and interest-rate assumptions, the net impact of which biases our CJT and MTL target prices slightly lower (Exhibit 2). Our recommendations (Exhibit 2) remain unchanged.
Cargojet remains our top pick in the group, with a 68% 12-month return potential. We believe that the visibility provided by its DHL agreement, dependence on long-term contract pricing, and the extent of the pullback in its valuation provide an attractive risk-return opportunity over the next 12 months.
Cargojet: We forecast that CJT will report a 15% y/y decline in EBITDA due to the unusually strong Q1/22 comparable, and the inevitable normalization/softening of pricing and volume that we believe has continued into early 2023. We believe that the y/y decline in domestic network volume, driven by lower consumer spending, and moderating charter demand will be partially offset by growth in ACMI revenue from an increase in DHL-contracted aircraft. We estimate that global industry air-cargo tonnage was down approximately 12% y/y in Q1/23, while spot pricing was down well over 30%. This highlights the value in CJT's significant exposure to CPI-based pricing, its take-or-pay revenue sources, and contracted capacity growth with DHL.
Mullen Group forecast EBITDA growth (11%) in Q1/23 is primarily due to its Specialized segment and LTL margin expansion. Recent reports by LTL comps indicate that yield preservation has largely offset volume weakness, leading to relatively flat operating income and stable margin. We estimate that Mullen will improve LTL margins y/y due to the use of new equipment, improvements in route density, and other company-specific factors. There are increasing indications that the start of a recovery in volume around mid-year will be pushed well into H2/23, given persistent macroeconomic headwinds and its impact on consumer spending behaviour and inventory levels. We assume that a meaningful recovery in H2/23 is unlikely, with historical relationships between trucking volume and economic factors suggesting that weakness could extend into 2024.
Andlauer Healthcare Group (AHG) modest forecast EBITDA growth of 1% in Q1/23 is primarily due to organic growth and a full-quarter contribution from LSU, offset by the absence of vaccine-related revenue and U.S. originating price pressure in that portion of its business (approximately 10%) that has exposure to spot reefer rates. Overall, AHG has very limited exposure to a weakening economy, while offering investors long-term upside related to favourable industry trends for temperature- controlled healthcare product transportation and logistics services.