Post by
retiredcf on Oct 17, 2022 9:05am
CIBC
EQUITY RESEARCH
October 16, 2022 Company Update
CARGOJET INC.
On The Road With CJT
Our Conclusion
We were on the road with Jamie Porteous (Chief Strategy Officer) and Scott Calver (CFO) from CJT. We continue to see a fundamental disconnect between CJT’s outlook and competitive moat versus where it is trading today. We maintain our Outperformer rating with CJT, one of our top picks. Our price target is $203.
Key Points
What happens if there is a recession?: A common question CJT faced, not surprisingly, is how its business model would fare in a recession. First off, CJT is not seeing any signs of volumes slowing down. We expect Q3 to be consistent with what we saw in H1, and Q4 should be the strongest quarter in the year. Customer conversations continue to point to a healthy volume environment. If there is a slowdown in 2023, CJT has multiple levers to pull on, including:
1) CJT could look to consolidate flights or downgauge aircraft. The company does this regularly and adjusts its capacity in real time. This saves on opex.
2) On the volume front, most long-term customers operate ~20+% above
their minimum guarantees. These long-term contracts mean that 75%-80% of domestic revenue is backed by take-or-pay agreements while ACMI are fixed revenue contracts. If CJT’s long-term customers all go to their minimum volume commitments, which is punitive in our view, the company can offset this with non-contract customer volume (i.e., retail customers). It has 400+ retail customers that look to move stuff on CJT’s network on standby. While CJT acknowledges a slowdown in the economy could result in a slowdown in volume growth, it viewed the risk of negative growth as a very low probability.
3) Back in 2020/21, CJT noted it could use another 5+ planes to meet
industry demand at that time. In other words, CJT was not supplying all the capacity to meet pandemic demand in the first place. This gives the company a buffer as consumer spending normalizes.
4) Within CJT’s ACMI segment, DHL has little incentive to shift volumes
away from CJT. 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. We would also note that the DHL strategic agreement is not backstopped by an assumption around significant volume growth but is a function of the shift in DHL’s strategy from using less belly capacity. In other words, the volume commitments being made by DHL reflect a shift away from belly to dedicated
capacity, which reduces the risks around this agreement.