Cargojet has 24% upside, Echelon Wealth Partners says

Strong results from its overnight and charter businesses led to first-quarter jumps in revenue and profit for Cargojet Inc. (Cargojet Stock Quote, Chart, News: TSX:CJT), which continues to exert its natural monopoly and competitive advantage in Canada’s air cargo sector, says Ralph Garcea of Echelon Wealth Partners. On Monday, the analyst maintained his “Buy” rating with a raised target price of $78.00.

Yesterday, Mississauga-based Cargojet announced its financial results for the first quarter ended March 31, 2018, producing total revenues of $99.2 million, an increase of $12.1 million or 13.9 per cent compared to Q1/17, and gross margin of $23.1 million, up 10.5 per cent over the previous year.

“Cargojet is very pleased with the continued revenue growth and margin improvements achieved during the quarter” CEO Ajay Virmani said. “We continue to carefully manage our operating costs and focus on greater utilization of our fleet.”

Those numbers beat both Garcea’s and the Street’s estimates for revenue (Garcea: $93.2 million, consensus: $94.6 million) and Adj. EBITDA (Garcea: $22.6 million, consensus $26.1 million) and beat Garcea on EPS at $0.33 (Garcea: $0.25, consensus: $0.48).

“We expect 2018 to be another solid cash generating year,” says Garcea in a client update. “We are modelling $93.9 million in CFOPS for 2018, or $6.96/sh. While its core overnight network generates robust cash flow, the upside lies in its [aircraft, complete crew, maintenance and insurance] business. While ACMI revenues grew only 7 per cent y/y in Q118, near-term growth was expected to level off due to the disclosed Air Canada ACMI contract roll-off, and we expect growth to pick up in the near-term as CJT recovers and exceeds the lost Air Canada revenue across its global air freight markets. We believe 2018 will be another substantive growth capex year, albeit not at the levels of 2017.”

“Canada has a very unique geography, which creates a special opportunity for CJT. A natural monopoly exists given Canada’s large and sparse footprint. First-mover advantage has created a sustainable competitive advantage for CJT,” says the analyst.

Garcea notes that e-commerce sales in 2017 accounted for only 2.7 per cent of total retail sales, which means that the penetration is still in the very early stages and that growth should continue to benefit CJT for years to come.

The analyst says that CJT currently trades at a 2018 EV/Rev and EV/EBITDA of 2.9x and 10.1x, respectively, which compares to its domestic freight peers of 3.2x and 9.7x, respectively, and its US-based freight peers of 3.8x and 10.4x, respectively.

Garcea’s new target of $78.00 (was $75.00) represents a projected return of 24 per cent at the time of publication.