Cargojet Inc.
(CJT-T) C$105.83
Q1/23; Demonstration of Resiliency in a Tough Environment Event
Yesterday morning, Cargojet announced Q1/23 Adjusted EBITDA of $75.0 million, compared with TD/consensus of $70.8 million/$76.2 million.
Impact: NEUTRAL
We are maintaining our BUY recommendation and decreasing our target price to $175.00 from $180.00. The lower target price reflects the impact of slightly lower valuation-period forecast Adjusted EBITDA and higher net debt. Our 2023 adjusted EBITDA forecast remains substantially unchanged, while our 2024 forecast is biased lower due to the delay in delivery of the first 777-200F for the DHL agreement, and our assumption that the second and third aircraft will be delayed by approximately 3-6 months. We are reducing our adjusted EPS forecasts due to the impact of the 777-200F delays (approximately 2/3 of EPS change), higher forecast D&A expense as a result of carrying forward the impacts from Q1/23 and our updated capital expenditure assumptions.
We believe that Cargojet's Q1/23 results demonstrated relative strength with domestic block hours up 0.7% y/y, ACMI revenue up 25% y/y, and Adjusted EBITDA margin down only 320 bps to 32.3% in the midst of an environment that is driving global air cargo spot rates down approximately 30% y/y and global air cargo volumes down 8-15% y/y.
Cargojet was able to sequentially improve its Adjusted EBITDA margin and generate Adjusted EBITDA that was only 10% below the unusually strong Q1/22 comparable. Looking forward, we believe that network adjustments, cost-saving initiatives, and the numerous contractual and competitive advantages enjoyed by Cargojet will limit the inevitable earnings pressure created by a period of consumer spending weakness and industry capacity growth. Cargojet is trading in line with its most attractive valuation in almost 10 years (Exhibit 3), despite the significant progress the company has made in establishing itself within the Canadian market, building valuable relationships with global leaders in cargo transportation, 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.