TFI International Inc T.TFII

TD

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Q1/22 Cargo Transportation Update & Preview TD Investment Conclusion

We are reducing our target multiples and updating our forecasts for two of our cargo transportation companies. The lower target multiples are due to our view that the current environment of higher inflation increases the uncertainty in our financial forecasts. In addition, historical sector valuation precedents suggest that multiple weakness of the magnitude observed over the last 6-12 months rarely reverses to the extent necessary to achieve our previous target multiples over a 12-month period. As a result, our TFI International (TFI) target price declines to $125.00 from $160.00 and our Cargojet target price declines to $210.00 from $230.00, while our Andlauer Healthcare Group (AHG) target price remains unchanged.

We have updated our currency, fuel price, and other operating cost assumptions, along with industry-specific data, the net impact of which biases our valuation period forecasts lower for Cargojet and TFI International. Due to the recent visibility provided by the DHL agreement, other company-specific factors, and its relative valuation, Cargojet (BUY) is our preferred stock in the group, followed closely by TFI International (BUY) and Andlauer Healthcare Group (HOLD).

Our cargo transportation coverage group will start reporting Q1/22 results on April 28.

Cargojet: Q1/22 results are expected to continue reflecting an increase in pricing due to a slower-than-expected return of belly capacity on wide-body passenger aircraft and the benefits of air-based transportation over ground. We forecast that labour cost inflation, the impact of higher fuel prices (and the corresponding surcharges), and the unusually strong margin in Q1/21 will lead to a y/y decline in adjusted EBITDA margin to a still strong 33%.

TFI: Q1/22 results are expected to continue benefitting from the strong pricing environment that is resulting from the tight industry capacity and the company's willingness to re-negotiate unprofitable contracts. Volume indicators showed modest y/y growth in Q1/22. Although spot equipment rates have started to turn lower, they remain 15-20% higher y/y. We acknowledge the market's concern regarding industry pricing; however, we believe that the industry supply/demand imbalance and the time required to expand supply will prevent a rapid decline in pricing, while allowing TFI to maintain strong profitability. We believe that TFI's margin expansion potential, willingness to shed unprofitable business, and its track record of acquiring new businesses will help the company grow despite broader industry headwinds.

AHG: Q1/22 growth is expected to reflect a full quarter of contribution from the acquisition of the remaining portion of Skelton USA and Boyle Transportation. We also forecast a 3.7% y/y increase in organic revenue. Despite our HOLD recommendation, we believe that AHG's strong franchise and healthcare transportation industry characteristics should provide protection from the potential pricing pressure that we anticipate will gradually affect other trucking companies over the course of 2022.