Cargojet Inc T.CJT

TD 2

[retiredcf]

Q2/24; ENCOURAGING OUTLOOK FOR WELL POSITIONED BUSINESS MODEL

THE TD COWEN INSIGHT

Cargojet reported Q2/24 Adjusted EBITDA of $79.1 million, up 6.5% y/y, vs. to TD/ consensus of $76.0 million/$78.7 million. The combination of Domestic and ACMI revenue was in-line while Charter easily surpassed. The resiliency demonstrated in Q2 and outlook in a still challenging environment for other cargo transportation modes provides confidence in our view of the low valuation for the stock.

Impact: SLIGHTLY POSITIVE

We are maintaining our BUY recommendation and increasing our target to $176.00 from $173.00. The increase to our target reflects the shift forward in our valuation period by one quarter, slightly higher forecast adjusted EBITDA, partially offset by higher valuation- period net debt. The changes in our forecasts reflect the carryforward of a portion of the strong Q2/24 EBITDA margin (34.3% vs TD: 33.1%), updated D&A assumptions (biases adj EPS forecast higher), and other minor modelling updates.

Given the current environment of cautious outlooks from many companies providing other modes of freight transportation, we view Cargojet's Q2 performance positively. Cargojet's 6.5% Adjusted EBITDA growth compares to a comp group of freight, courier and air cargo transport companies for which consensus forecasts/reports imply an average Q2/24 EBITDA decline of 4%. Cargojet reported revenue growth across all segments and provided an outlook that supports continued growth despite the challenging macroeconomic backdrop. The new Great Vision agreement and China e-commerce strength drove Charter revenue growth (24%). Resilient e-commerce demand, CPI-indexed pricing, and B2B volume drove Domestic Network revenue growth (11% vs. TD: 8%).

We view management's outlook as being more optimistic than during the Q1/24 cc. Strong demand across the company's segments, constructive discussions for future new contracts and the deployment of previously deemed surplus aircraft contributed to a decision to pull forward the delivery of two B767-300 aircraft (one of which is growth aircraft that will be used to execute potential e-commerce charter opportunities) and invest in two B767 feedstock.

We believe investors should take advantage of the recent share price pullback and low valuation (0.9x EV/EBITDA discount relative to comps vs. pre-pandemic 5-year average premium of 2.6x) given Cargojet's business model, competitive position within Canada, e- commerce growth potential, balance sheet and our forecast for 18% EBITDA growth from 2023-2026.