Still a solid outlook for Cargojet, says Beacon

Beacon Securities analyst Ahmad Shaath’s expectations for Cargojet (Cargojet Stock Quote, Charts, News, Analysts, Financials TSX:CJT) experienced some slight turbulence in a report to clients on Monday, as he lowered his target price to $265.00/share from $275.00/share to go along with a maintained “Buy” rating.

Founded in 2005 and headquartered in Mississauga, Cargojet provides air cargo services across North America, to the Caribbean and to Europe. Its main air cargo business consists of operating a domestic overnight air cargo co-load network between various Canadian cities, while also providing international air cargo services, dedicated aircraft charter and dedicated aircraft, crew, maintenance and insurance (AMCI) contracts.

Shaath, who attributes the lowered target price to contracted general multiples as a result of more moderate growth expectations on the domestic front, higher fuel costs and paired with continued strength in the company’s all-in charter revenue, provides his latest analysis after Cargojet reported its third quarter financial results, which Shaath called mixed.

Cargojet’s financials were headlined by the company producing $190 million in revenue for the quarter, beating the Beacon Securities estimate of $180 million and the consensus projection of $179 million. 

A big reason for the revenue beat was Cargojet’s all-in charter revenue coming in at $24 million compared to the Beacon Securities estimate of $15 million, despite the domestic network revenue being slightly below expectations ($80 million compared to the Beacon projection of $83 million, largely on account of a new CMI contract with Amazon coming into effect), with the company’s other revenue streams (ACMI, fuel and other passthroughs, and leases, FBO and other) being either in line or slightly ahead of expectations.

The company’s expanded relations with Amazon Canada include the company agreeing to operate two Amazon-owned B767-300BDSF aircraft as part of the Amazon Air network on an initial four-year contract, with three two-year renewals also built into the deal.

“Ocean and ground transportation supply-chains remain clogged across the globe creating short-to-medium term opportunities for air-cargo. We are seeing that reflected in our ACMI business and expect this to extend through the upcoming holiday season,” said Dr. Ajay Virmani, President & CEO in the company’s November 1 press release. “As economies and businesses re-open, Consumers are keen to step out and experience in-person shopping. But our longer-term outlook for e-Commerce remains strong, particularly given the dramatic uplift in digital adoption over the past 18 months.”

The company’s quarterly EBITDA of $71 million was in line with expectations, though the EBITDA margin proved to be a miss at 37.4 per cent compared to the Beacon projection of 40.2 per cent and consensus expectation of 38.5 per cent. Shaath notes that the margin miss is mainly due to higher crew costs (annual salary increases per the collective agreement, positioning and training costs) and, to a lesser extent, higher commercial costs (e.g. insurance, landing, navigation, etc).

“Management indicated that a good portion of the cost increase was related to the ramp up of new operations as well as re-training costs as recently-trained staff were attracted to their prior passenger-airlines employer,” Shaath said.

The recent results have prompted changes in Shaath’s financial projections for the company, as he now projects revenue to reach $731 million in 2021 instead of his initial $714 million projection, producing a potential 9.3 per cent year-over-year growth. For 2022, Shaath now projects a jump to $805 million in revenue from the original $765 million estimate, producing potential year-over-year growth of 10.1 per cent.

However, Shaath has slightly lowered his EBITDA projection for 2021 to $283 million from $285 million, with 2022’s projection remaining at $306 million. Shaath’s EPS projection also takes a hit in his latest analysis, lowering his 2021 estimate to $5.61/share from $7.05/share, with a revised 2022 estimate of $6.66/share instead of $7.11/share.

Despite some lower values, Shaath’s valuation data still presents Cargojet positively, as he projects the EV/Sales multiple to drop from the reported 5.3x in 2020 to a projected 4.8x in 2021, followed by a slight dip to 4.6x in 2022. The EV/EBITDA multiple is projected to slightly rise to 12.5x in 2021 from 12x in 2020, though Shaath projects a drop to 11.6x in 2022, with the P/E multiple following a similar track, rising from the reported 31.1x in 2020 to a projected 33.5x in 2021, then falling to a projected 28.2x in 2022.

Overall, Shaath remains positive on Cargojet’s ability to command the skies and maintain its market.

“Looking ahead, the impact of Amazon’s move to a CMI contract is now well understood, with the newly-acquired B757s providing ample capacity for CJT to pursue new high-margin ACMI business beyond what we currently model,” Shaath said.

Overall, Cargojet’s stock price is down 14.2 per cent for the year to date, flying high at $222.48/share on January 7 before dropping to a low point of $162.24/share on March 31, though it has rebounded nicely with 11.1 per cent growth since then. At press time, Shaath’s target of $265 represented a projected one-year return of 42 per cent.