Cargojet will keep winning, this investor says

A huge capital raise will be taking Cargojet (Cargojet Stock Quote, Chart, News, Analysts, Financials TSX:CJT) to a whole new level in terms of profit, says Starlight Capital’s Varun Anand, who likes the name for continuing e-commerce tailwinds.

Overnight shipping company Cargojet is preparing to bulk up after closing this week on an over-subscribed bought deal financing round that netted the company $365.4 million. With demand for cargo shipments skyrocketing last year during the pandemic, Cargojet says it will use the proceeds to expand its fleet by spending $200 million on five B767 freighter aircraft, a new hanger and facility infrastructure in Canada along with the paying down of some debt.

Cargojet is looking beyond Canada, as well, saying they’ll be buying two long-range B-777 freighter aircraft for international routes at $75.0 million a pop as part of their US and international growth strategy.

“The COVID-19 pandemic has significantly increased demand for Cargojet’s international air cargo services. Air cargo capacity has been severely constrained due to the reduction of passenger aircraft operating on international routes and it is uncertain when such capacity will return to pre-pandemic levels,” said the company in a February 1 press release.

“Furthermore, US and international air cargo growth opportunities have emerged as a result of rapidly evolving global supply chains and a lack of air cargo capacity in key markets,” Cargojet said.

Cargojet was a big winner last year as the company’s share price shot up along with revenues. CJT finished the year up 108 per cent, although the stock has been mostly trading sideways since early November.

Even with all the gains, Anand says the runway looks good for Cargojet.

“I would recommend Cargojet. It’s an air cargo transportation company [with] dominant market share in the domestic market and we like them because they’re leveraged to the boom in e-commerce,” says Anand, speaking on BNN Bloomberg on Thursday.

“They recently did an equity raise where they raised about $300 million, and that’s going to be used to expand their fleet by seven planes over the next five years,” he said. “Based on their track record they fulfill capacity quite quickly and that ends up being a very strong profit and EBITDA generator for them.”

“We think the boom from e-commerce that they’ve experienced and from the lockdowns in 2020 is set to continue and that secular trend of people ordering online and avoiding shopping is going to continue and Cargojet is an excellent way to play that trend,” Anand said.

Cargojet will release its fourth quarter 2020 results on March 1, which will tell the tale on how the company fared over the holiday season — Cargojet said in its third quarter presser in early November that it had already been operating at “near peak level volumes” over the Q2 and Q3.

For that third quarter, CJT generated better-than-expected revenue and earnings, with revenue jumping from $117.4 million in 2019’s Q3 to $162.3 million and adjusted EBITDA moving from $39.1 million to $78.1 million. Those compared to analysts’ consensus estimates at $153 million and $62 million, respectively.

By late November and partway through the holiday season, Cargojet said it was taking extra measures (adding extra aircraft, staffing and flights, for instance) to handle the uptick.

“The surge in volumes that started in March/April of this year has already exceeded typical peak season volumes. With holiday shopping now shifting into high gear, and based on our customers’ forecasts we expect to handle even greater volumes in the coming weeks. This peak is expected to be like none other,” said Cargojet in a November 25 press release.

Aside from its domestic overnight business, Cargojet has a charter plane segment and an ACMI (Aircraft, Crew, Maintenance and Insurance) segment, the latter of which recently grew through an expansion of the company’s agreement with shipper DHL Express. Cargojet announced in December the addition of three new routes operated for DHL by three of Cargojet’s B767-300F freighter aircraft.

After the third quarter results in November, Cargojet got a number of positive reviews from analysts, with BMO Capital Markets raising their target on the stock from $245 to $265 per share and subsequently re-raising this past Tuesday to $270. Scotiabank moved its target in November from $225 to $230 and then re-raised this week to $240 per share

Analyst Ahmad Shaath of Beacon Securities kept his “Buy” rating and moved his target from $310 to $325 on November 3, saying the structural changes in retail show no signs of letting up, which will keep benefitting Cargojet.

“Trends on the domestic network continue to confirm our initial thesis with regards to the step-function-like uptick in e-commerce penetration in retail sales,” Shaath wrote in a client update. “Management’s comments continued to echo this rhetoric, pointing out to Canada’s eCommerce sales that jumped four pps this year to 11 per cent as a percentage of total retail sales. 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.”