Post by
retiredcf on Nov 03, 2022 12:29pm
CIBC
EQUITY RESEARCH
October 31, 2022 Earnings Update
CARGOJET INC.
Underappreciated Flexibility
Our Conclusion
CJT’s recent Investor Day (link to note) highlighted its long-term earnings
potential. A concern we hear from investors is whether CJT’s near-term
optimism actually poses a risk in that it was not preparing for a recession. Q3 results highlighted the resiliency in CJT’s earnings and the flexibility it has in responding to a freight slowdown. CJT is not looking at the world through rose-coloured glasses and is cognizant of the macro risks facing the economy. There is an underappreciation in the flexibility it has to protect earnings. Maintain $203 price target and Neutral rating.
Key Points
Increasing Capex Flexibility: One of the concerns we hear with CJT’s fleet investment plan is that there is a risk it will be forced to add capacity while the underlying demand environment slows. CJT noted on its earnings call that it has the option to defer up to $300MM of capex, an increase from the $150MM - $200MM range the company provided for capex deferral estimate from its Investor Day. The company has already deferred one of its planned 777s from 2026 to 2027 and has the option of deferring another one. CJT also has the option of deferring two 767s planned for 2023 or cancelling them altogether. We would also note that this increased flexibility is not in reaction to recent developments, but rather the optionality CJT has built into its fleet plan, highlighting its risk management procedures. With DHL underwriting the majority of CJT’s fleet expansion plan, CJT can proactively reduce the amount of spare capacity it plans to take on should demand conditions soften. This helps protect CJT’s balance sheet and margins.
ACMI Provides Revenue/Earnings Protection: Q3 ACMI revenue was up
47% Y/Y to $66MM, driven by the number of ACMI routes that started this year. CJT will also be starting a new route between Europe, Halifax, and Los Angeles this week, which will contribute $15MM - $16MM of annualized revenue. All in all, the pipeline of opportunities remains solid on ACMI, and 2023 should see the full-year effect of significant routes added in this year (DHL and AMZN). We estimate ACMI revenues will reach ~$300MM in 2023 based on existing contracts. We see continued upside in ACMI revenues given the DHL strategic agreement and the overall positive demand environment for dedicated freighter capacity with the structural shift away from passenger belly capacity.
The ACMI business also provides good downside protection as it is based on fixed-revenue contracts (CJT charges a fixed rate per block hour for a minimum number of block hours per month), so ACMI revenue is less cyclical. Lastly, DHL, CJT’s main ACMI customer, has little incentive to shift volumes away from the company. CJT is the only charter company that has a long-term ACMI contract, and it has the best on- time performance. Arguably if DHL’s volumes underperform, it is more likely
it would consolidate volumes away from one of its other charter companies first, with CJT potentially winning market share.
Comment by
DanielDarden123 on Nov 05, 2022 1:05pm
We derive our $203 price target by applying an adjusted EV/EBITDA multiple of 12x to our 2023 estimate. This multiple is in line with where the company has traded historically. We use pro forma adjusted net debt of $582MM. My Take: At $130 presently it is trading at ~8x their ‘23 estimate. How long before most realize the value here? Recessions do end!