Following the announcement of a strategic partnership with Amazon, Echelon Wealth Partners analyst Gianluca Tucci has raised his price target on CargoJet (CargoJet Stock Quote, Chart, News TSX:CJT).
On Friday, CJT announced it had struck a deal with Amazon affiliate Amazon.com NV Investment Holdings LLC that will see Amazon acquire up to 9.9 per cent of Cargojet’s variable voting shares at an exercise price of $91.78 per share. The variable voting shares will vest based on the achievement of commercial milestones. The arrangement adds to the existing commercial agreement that sees the American tech giant use CargoJet for overnight air cargo services
“Cargojet’s entrepreneurial culture, combined with our core values of strong customer focus, have enabled Cargojet’s customers to deliver and fulfill on their e-commerce promises. This agreement will support Cargojet further solidify its vision and strong leadership in the air cargo industry,” said CargoJet chairman James R. Crane.
Amazon currently operates seven fulfilment centres across Canada with three more ready by the end of 2019…
“The commercial relationship the Cargojet team continues to build with Amazon has now allowed us to further strengthen and align our long-term strategic commercial interests. Our continuous commitment to provide value added services enables us to earn all of our customers’ trust as the leading overnight air network operator,” CEO Ajay Virmani added.
Tucci says this deal reaffirms his thesis that CargoJet is the “Amazon of the North” and further validates the company’s business model.
“Amazon currently operates seven fulfilment centres across Canada with three more ready by the end of 2019 and one to be live in Q120,” the analyst notes. “In total, the seven current active fulfilment centres represent 3.6M square feet with the four planned fulfilment centres to add an additional 3.5M square feet of fulfilment space, effectively doubling Amazon’s current Canadian footprint. Cargojet is a direct beneficiary of this trend.”
In a research update to clients Friday, Tucci maintained his “Buy” rating on CargoJet, but raised his one-year price target on the stock from $120.00 to $130.00, implying a return of 44 per cent at the time of publication.
The analyst thinks CJT will post Adjusted EBITDA of $152-million on revenue of $498-million in fiscal 2019. He expects those numbers will improve to EBITDA of $173-million on a topline of $548-million in fiscal 2020.
The analyst drilled down on Friday’s arrangement, predicting success.
CargoJet Amazon deal breakdown…
“As part of the agreement, Cargojet will issue the warrants to Amazon in two tranches,” he noted. “The first tranche of warrants allows Amazon to acquire up to 9.9% of Cargojet’s variable voting shares at an exercise price of $91.78 per share. The first tranche of warrants will vest over a period of six and a half years, with vesting tied to the delivery by Amazon of up to $400M in business volumes during the same term. Amazon will also receive additional warrants to acquire up to an additional 5% of Cargojet’s variable voting shares with vesting tied to the delivery by Amazon of up to an additional $200M in business volumes after the first tranche of warrants is fully vested. The vesting period for the second tranche of warrants will continue for an additional year, making the aggregate term of all the warrants equal to seven and a half years from the date of the agreement. The exercise price of the second tranche of warrants will be set two years after the date of the agreement using the 30 day VWAP immediately prior to the second anniversary of the agreement. The volume milestones are inclusive of existing business between the two parties and we believe will be handily exceeded over the term of the agreement.”
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