Cargojet Inc.
Highlights from the RBC Canadian Automotive, Industrials & Transportation Conference
TSX: CJT | CAD 111.64 | Outperform | Price Target CAD 202.00
Sentiment: Neutral
This afternoon, Jamie Porteous, Executive Vice President & Chief Commercial Officer, and Scott Calver, Chief Financial Officer, of Cargojet, presented during day three of RBC’s Canadian Automotive, Industrials & Transportation Conference.
CJT business holding up better versus transport peers
Management still expects domestic overnight revenue to be flat y/y. Notable from our discussion with CJT this afternoon was commentary that the demand outlook is not overly negative and that management continues to expect domestic revenue to come in flat y/y. Management highlighted that revenue was up low-single digit in Q1 and Q2 QTD was trending similarly. This was in contrast to the other transportation companies we spoke with at our conference who noted meaningful weakness in volumes. Key is that CJT's largest customers expect a rebound in demand in the back half as inventories normalize, which would represent upside to CJT's current guidance and consensus expectations.
ACMI not immune from macro. ACMI expectations haved moved lower due to global eCommerce headwinds, which are reducing block hours reflecting a shift from long haul flights out of China to more short haul routes within the Americas. However, we expect new routes to the Caribbean and South America to drive upside during the remainder of the year; and longer term we continue to believe that favourable eCommerce tailwinds will cause revenue growth to reaccelerate meaningfully once the macro improves and structural trends get back on track. Moreover, we expect ACMI demand to benefit from shifts toward narrow body aircraft and strategic decisions from companies such as DHL to exclusively use freighters as opposed to belly capacity reflecting better service.
Capex optionality a positive
Capex. Management today spoke to their decision to defer four 777s, which we highlight represents the aircraft not currently contracted with DHL. We believe this meaningfully reduces overcapacity risk as well as pulls forward the company's FCF inflection. This implies capex of $200MM in 2023 and of $350MM in 2024, in line with our estimates. Key in our view is that right now all of CJT's new aircraft are either contracted with DHL or will be used in the Domestic business reducing risk associated with a slowdown in the economy. This positions CJT well into 2025 as the company has optionality to either take on additional aircraft if macro conditions warrant or cancel those aircraft, which would pull forward the company's FCF inflection to 2025.
Margins expected to expand
Margins expected to be expand y/y despite volume headwinds. Management highlighted today the positive outlook for the company's margin profile. Management pointed to a number of initiatives they are undertaking to reduce costs including rightsizing the network to reduce block hours, identifying opportunities for surplus aircraft, and operationalizing 100% of pilot training in Hamilton post delivery of CJT’s second flight simulator. In addition, management believes that a number of one-time costs incurred in 2022 related to growth and supply chain congestion will not carry forward into 2023 thereby supporting y/y margin improvement, an important positive from today's update.
Shares fundamentally mispriced
Shares do not reflect structural changes in the airfreight market. Tying it all together, we continue to see CJT as a mispriced security. We point to the acceleration of eCommerce adoption from COVID-19 as well as a shift from wide body to narrow body aircraft, which has reduced belly capacity - two key positives for CJT longer term. During this time since 2019 CJT's revenue and EBITDA have doubled; however, the share price remains mostly unchanged over that time frame. Key is that we expect growth to reaccelerate meaningfully when the macro environment recovers, and expect the shares to re-rate higher creating in our view a significant investment opportunity at today's levels.