CargoJet’s new deal with Amazon is a winner, Beacon says

CargoJet’s stock got another price target raise Friday, this time from Beacon Securities.

With a new Amazon deal under its belt, Canadian air cargo carrier CargoJet (CargoJet Stock Quote, Chart, News TSX:CJT) should be headed for margin expansion, says Beacon Securities analyst Ahmad Shaath, who last Friday upped his target price for the stock.

CargoJet’s share price surged to a record high on Friday on the announcement of a new strategic agreement with Amazon under which the e-commerce giant would own up to 14.9 per cent of CJT if it delivers $600 million in revenues to CargoJet’s core overnight network over the next 7.5 years.

“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,” said CEO Ajay Virmani in a press release.

The deal involves two tranches, the first of which has CJT issuing warrants to Amazon allowing it to purchase up to 9.9 per cent of the company at an exercise price of $91.78 per share, vested over a period of 6.5 years and based upon the delivery by Amazon of $400 million in revenues to CJT. The second tranches would see Amazon giving warrants for an additional 5.0 per cent and would be tied to an additional $200 million in revenue, with the price to be based on 30-day VWAP two years from last Friday.

CargoJet gets new $130.00 price target at Beacon

Shaath says  the deal increases his confidence in his high-single-digit (seven to nine per cent) growth assumption factored into his forecasts for CJT’s overnight network and effectively adds a second and stronger foundation (the first being Canada Post/Purolator) to Cargojet’s core overnight network revenues.

It also eliminates the potential for Amazon to seek other partners in Canada, says Shaath, who predicts that there is a “strong potential” for margin expansion from increased utilization as CJT’s relationship with Amazon grows into further weekend and/or daytime flights..

“We believe this agreement will help CJT increase the utilization of its existing network and fleet materially over the medium and long term. As part of the announcement, management alluded to the potential for additional flights both during daytime and the weekends as part of becoming a strategic partner with Amazon,” Shaath writes in a client update.

“We believe this agreement will result in Amazon adding scheduled flights to CJT’s network. This will be helped by CJT’s other customers as they will benefit from this extra daytime/weekend capacity that is anchored by Amazon. Ultimately, this will not only deliver growth over and beyond what we currently capture in our forecast but also help drive margin improvement on the back of this increased asset utilization,” he says.

CargoJet’s stock is undervalued, analyst says…

For comparison’s sake, Shaath points out that after Amazon announced a similar agreement with Atlas Air Worldwide in 2016, share of the latter more than doubled over the following 12 to 14 month period and its EV/EBITDA valuation multiple expanded by 1.5x turns.

The analyst has upped his forecasts for CJT, now calling for fiscal 2019 revenue and EBITDA of $496 million and $152 million, respectively, and fiscal 2020 revenue and EBITDA of $529 million and $169 million, respectively.

With the update, Shaath has reiterated his “Buy” rating on CargoJet’s stock and added the new target price of $130.00 (previously $120.00), which represented a projected return of 27 per cent at the time of publication.