Everything’s coming up roses for Canadian air cargo services company Cargojet (Cargojet Stock Quote, Chart, News TSX:CJT), which just released third quarter financials that beat estimates. In an update to clients on Tuesday, Beacon Securities analyst Ahmad Shaath reviewed the numbers and gave a target raise to CJT.
Mississauga-headquartered Cargojet has air cargo services across North America, to the Caribbean and to Europe and operates a domestic overnight air cargo co-load network between cities in Canada. The company’s third quarter 2020, reported on Tuesday, saw revenue climb from $117.4 million for Q3 2019 to $162.3 million, while adjusted EBITDA grew from $39.1 million to $78.1 million. Cargojet generated $59.3 million in adjusted free cash flow for the quarter and a total of $144.8 million over the nine months ending on September 30, 2020.
Management said that while the company has been operating at near peak level volumes over the past two quarters, it will be deploying additional resources across the network over the upcoming holiday season.
“There is no doubt that Cargojet’s Domestic Overnight Network continues to benefit from the elevated levels of e-Commerce, but we are equally focused on ensuring that we are building strong long-term growth in our ACMI and Charter businesses. We are also continuing to invest in growth opportunities while prudently strengthening our Balance Sheet with an overall reduction of $92 million in net-debt on a year-to-date basis,” said Cargojet president and CEO Dr. Ajay Virmani in a press release.
In his report, Shaath said the Q3 numbers blew past even the Street’s most optimistic estimates, now for the second quarter in a row. Revenue of $162 million was better than the analyst’s $145-million estimate and the consensus $153 million, while adjusted EBITDA of $78 million was also better than Shaath’s $57 million and the Street’s $62 million.
The results show Cargojet to be continuing to benefit from “the new norm” of accelerated e-commerce sales, said Shaath.
“The tailwinds from the COVID-19 pandemic to CJT’s business continue to surprise us (and the Street) to the upside,” Shaath said. “The structural changes in the retail space show no signs of abating and the struggles of passenger airlines are starting to show signs of structural change in international trade flows, both benefiting CJT. The increased asset utilization will help sustain elevated EBITDA margins and boost FCF levels. The company’s balance sheet has improved markedly and CJT sits in an enviable position to access capital as needed to fund any growth initiatives, which are plenty in our view.”
Shaath said that Cargojet, which along with its cargo business provides dedicated aircraft to customers on an Aircraft, Crew, Maintenance and Insurance basis (ACMI), is now bidding on three additional aircraft, which the analyst said bodes well for future growth in ACMI. If the company is successful with the bids, the aircraft should be ready for deployment by the third quarter of 2021.
Shaath noted continued strength in the Q3 from CJT’s ACMI business at $37 million versus his estimate of $30 million and was helped by the addition of another route between the US and Mexico at the end of September as well as elevated rates given the peak season. The company’s charter business was also strong, according to the analyst, with Q3 revenue at $24 million versus his $21-million forecast and driven by demand from from federal and provincial governments for PPE and medical supplies.
“Growth in the charter business might take a pause in Q4/FY20E as management elects to be completely focused on its domestic network during the peak season. Trends continue to be supportive, with management confirming the strong demand environment from its clients, some of which are looking to lock in capacity months in advance and for an extended period of time (i.e. commitment for months vs ad-hoc basis 1-2 days in advance). These trends bode very well for future growth in the charter business, especially during off-peak periods where CJT has more idle capacity (i.e. during the day and weekends),” Shaath said.
With the update, Shaath is maintaining his “Buy” recommendation for CJT and lifting his target from $310.00 to $325.00, which at press time represented a projected 12-month return of 34 per cent.
Cargojet’s share price climbed an impressive 46 per cent over 2019 but 2020 has been another story altogether, with CJT now up 133 per cent year-to-date.
Last month, Cargojet’s Virmani was named Strategist of the Year and one of Canada’s top leaders of 2020 by the Globe and Mail’s Report on Business, with the item to be released in the Globe’s December issue of Report on Business.
“True to his entrepreneurial spirit, [Virmani] started Cargojet in the thick of 9/11 crisis and in less than 20 years turned it into an air-cargo powerhouse with recognition on the TMX 30 as one of Canada’s top performing stocks two years running,” said Cargojet’s Chair of the Board of Directors, James Crane, in a press release.