TD TD Cowen analyst Tim James sees Cargojet Inc. set to face greater pressure from heightened wage cost pressures, warning “heightened overtime and training costs will continue through early 2025, followed by a need to increase wages to align with industry rates in H2/25, both of which should weigh on margin.”
“The volume and pricing outlook remains strong across business lines,” he said. “Management sounded optimistic on Q3/24 cc re: peak season (despite acknowledging modest pull forward into Q3) and early 2025. Recent industry pilot wage inflation expected to necessitate catch-up contract with CJT pilots during 2025 in order to remain competitive in attracting and retaining pilots.
“In the interim, we believe CJT will continue to incur heightened overtime and pilot related costs. This is expected to limit margins in 2025/2026. TD forecast 32.6 per cent/32.7 per cent adj EBITDA margin in 2025/2026 vs. 33.6 per cent in 2024. Q3/24 adj. EBITDA of $82.2 million, up 17 per cent year-over-year. Results were strong when considering economic environment and results of key trucking comps. CJT’s 15 per cent/17 per cent rev/EBITDA growth compares to a comp group (SAIA, ODFL, TFI, AND, MTL) which generated average Q3/24 rev/EBITDA growth of 5 per cent /7 per cent.”
With a reduction to his financial forecast for the Mississauga-based company, Mr. James said he’s also “monitoring risk related to Trump Presidency and impact of tariffs and/or de minimus import exemptions which could impact air cargo markets. At this time, we don’t factor in a material impact.”
Keeping a “buy” rating for its shares, he trimmed his target to $165 from $167. The average on the Street is $160.73.
“Our 10.0 times multiple reflects the historical premium/discount of CJT to comp groups of 1) LTL’s, 2) freight and courier companies, and 3) rails. It also reflects its own historical and current valuation multiples,” he said. “We believe multiple expansion to 10.0 times (current fwd 8.3 times) over the next 12-months will result from earnings growth, deleveraging, buy-backs, anticipation of cost pressure normalization in 2026, and growing appreciation by the market for the value in the company’s competitive position in Canada and relationships with Canadian/ global air freight/e-commerce heavyweights (DHL, Amazon, UPS, Great Vision).”