CIBC 2Also maintain their current target. GLTA
EQUITY RESEARCH
November 5, 2024 Earnings Update
CARGOJET INC.
Differentiated Growth
Our Conclusion
CJT’s Q3 results reinforced our positive outlook on the name. The company
benefits from a healthy revenue environment and continues to exhibit capital
discipline. While CJT was transparent that visibility around when these
headwinds may subside is unclear, we note the company is doing a good job
managing its cost structure, all things considered. We maintain our
Outperformer rating and $172 price target.
Key Points
Differentiated Growth: While the North American freight economy
continues to navigate through a recession, CJT’s differentiated growth
strategy puts it in a league of its own. The company has posted core revenue
and EBITDA Y/Y growth for four quarters in a row, suggesting that it is
benefiting from an upcycle already. The key factors we see driving this are:
1) while there are concerns over the health of the Canadian consumer, CJT’s
new Chinese e-commerce contract taps into a more price-sensitive
customer. CJT has seen frequency with Great Vision HK increase to 5-6
flights per week, vs. the contracted three flights per week. While the contract
is to ship goods into Vancouver, there are opportunities to move freight to
Hamilton and into CJT’s domestic network. These would be incremental
revenue opportunities. Overall, the relationship with Great Vision HK Express
reminds us of how CJT has grown with other key customers like Amazon and
DHL.
2) CJT continues to see healthy growth from Amazon and DHL.
3)CJT’s ACMI operations ended 2023 with 15 aircraft, and two more added on a temporary basis. Initially these incremental aircraft were to be used for just Q1/24 but have been continuously extended and will now operate for the
remainder of the year. In addition, two more aircraft have entered the ACMI
fleet for peak season. This highlights that ACMI continues to be a growth
vehicle for CJT, and we would expect some of the incremental aircraft that
have entered the fleet to continue on into 2025.
4) CJT is benefitting fromsupply chain disruptions which are acting as a tailwind for its ad hoc charter operations.
5) CJT benefits from contractual price index increases.
Capital Discipline: CJT’s Q3 results highlight its ability to add volume
without incurring incremental capex to grow the fleet. CJT’s block hours were
up 15% Y/Y in the third quarter and it was able to service this volume with
the exact same fleet count as a year ago. CJT started the year with ~15%
excess capacity and this has been used up. CJT noted it has two B767-300
aircraft currently in the conversion process and progressing as planned for
induction into the fleet in 2025. The first converted freighter is expected to be
delivered in the second quarter and the second freighter should follow in the
third quarter. In addition, CJT has a B767-200 under lease that will expire
February 28, 2025. CJT thus has the ability to add 1-2 net aircraft to its fleet
next year to help ensure it has sufficient spare capacity and to manage its
growth. We expect CJT’s capex next year to total $170MM, which would
position it to continue to generate FCF.