Cargojet Inc T.CJT

RBC 2

[retiredcf]

Their upside scenario target is a double ($250.00). GLTA

August 14, 2024

Outperform

TSX: CJT; CAD 120.95

Price Target CAD 189.00

Cargojet Inc.

Strong growth in weak environment bodes well for when macro improves

Our view: The key takeaway from this quarter is the positive outlook inflection that has prompted mgmt to accelerate its aircraft purchase to add an additional aircraft into the fleet. Key is that this is not an on- spec purchase, but rather a refection of the strong future demand in the Cdn air cargo market. Further, the additional capex is offset entirely by lower maintenance capex - meaning no incremental capex spend. We see CJT as preparing astutely for (meaningful) future growth, and this growth is not being reflected in the shares. Reiterate CJT as our top idea in Transportation.

Key points:

Q2 slightly higher. CJT's EBITDA of $79MM was a touch above consensus of $78MM (RBC: $80MM). Key is that Cargojet continues to achieve strong revenue growth (>10%) despite a tepid macro environment - which is particularly remarkable in our view. Highlights from the release, conference call, and our subsequent call back with mgmt. are as follows:

• Adding capacity as CJT positions for a significant growth inflection - and at no incremental capex cost. A key driver of CJT's recent growth has been the "explosion" of demand for air cargo services out of China (details here), which resulted in new contract wins with at least one Chinese based customer. This growth in charter demand (+24%), combined with solid growth domestic (+11%), is on pace to absorb CJT's projected excess capacity - prompting CJT to accelerate the conversion of its existing feedstock in 2024. There are two key takeaways from this: 1) the conversion of this excess capacity is poised to drive significant near- term growth; and 2) the added feedstock capacity to replace that which was converted in 2024 comes at no incremental capex cost.

• The second key takeaway is ... well, that was it ... read the first takeaway again: strong demand in a weak environment that has resulted in an opportunistic build out in capacity at no incremental cost. Mike drop.

• Our street high 2025 estimates are looking pretty good right now. Our 2024 EBITDA estimate is unchanged post Q2, though commentary around 2024 peak season sounded very bullish, meaning there is clearly room for upside to these numbers. Turning to 2025, we are at $375MM vs consensus $355MM. Expect that consensus number to go materially higher. We are leaving that number unchanged for now - as we assume that the new aircraft will replace the current leased aircraft. Key however is that this aircraft will likely remain on lease if current trends exist, providing further upside to our 2025 estimates.

  • Valuation screening extremely attractive. Trading at 7.2x our 2025E EBITDA, the shares are clearly trading at a discount at an absolute level; relative to history (range 7.5x to 15.8x), to trucking (TFI and AND at 9.3x); and to rail (CN and CP at 13.1x). CJT represents an exceptional investment opportunity - the best in our coverage universe in our view - and we continue to rate it as our top idea in Transportation.