Cargojet wins a target raise from Beacon Securities

Ahmad Shaath of Beacon Securities is once again ready to take off with Cargojet (Cargojet Stock Quote, Charts, News, Analysts, Financials TSX:CJT), maintaining a “Buy” rating and raising his target price from $250/share to $275/share for a projected return of 63 per cent in an update to clients on Tuesday.

Mississauga-based Cargojet is a scheduled cargo airline with services in Canada and internationally, providing time-sensitive overnight service and operating domestic air cargo network services between fourteen cities in North America. CJT shares jumped over 13 per cent in trading on Tuesday after the company announced an agreement with German logistics company DHL which will see the latter absorb almost all of the incoming B767s and half of the incoming B777s being added to Cargojet’s fleet.

The strategic agreement between Cargojet and DHL expands on a pre-existing one spanning 15 years to this point and will cover the 12 existing freighters in place for an initial run of five years, with the potential for two additional years at a total estimated value over seven years of $2.3 billion. The deal will see DHL add five B767’s to its fleet in the 2022 and 2023 fiscal years while absorbing most of Cargojet’s incoming B767’s in that time. With the new agreement, DHL will also become the first customer for Cargojet’s incoming B777 fleet, as the contract covers the first four aircraft.

The agreement will be largely on an ACMI (Aircraft, Crew, Maintenance and Insurance) basis, with clauses covering potential for CMI, charter and dry lease options depending on available capacity. DHL intends to use the aircraft on its international routes over Europe, North and South America as well as Asia.

Furthermore, the agreement also sees DHL become a shareholder in Cargojet with warrants to acquire up to 9.5 per cent of outstanding shares at an exercise price of $158.92/share, representing about 1.65 million shares. Similar to Cargojet’s previous agreement with Amazon, those shares will vest over the term of the contract and based on the volumes and revenue generated.

“Earning the trust and confidence of Deutsche Post DHL Group is a remarkable milestone in Cargojet’s journey. We are even more excited about the opportunity to add value and earn the right to be a long-term strategic partner each and every day.” said Dr. Ajay Virmani, Chief Executive Officer of Cargojet in the company’s March 29 press release. “This strategic partnership is a real tribute to our people who have worked extremely hard all through the pandemic while maintaining the industry best on-time performance and flexibility that has allowed us to earn this business.”

The agreement has prompted Shaath to revise some of his financial projections for the company, having raised his revenue outlook for 2022 from $876 million to $889 million for a potential year-over-year increase of 17.3 per cent. He also raised his projection for 2023 revenue from $883 million to $927 million, good for a potential year-over-year increase of 4.3 per cent. Shaath also noted that the projections do not account for any B777 revenue, as they are not expected to arrive until late in the 2023 fiscal year.

“In our view the [DHL] agreement puts to bed any concerns the Street might have had over the growth plans announced with Q4/FY21E results (we had none),” Shaath said.

From a valuation standpoint, Shaath forecasts the company’s EV/Revenue multiple to drop from the reported 4.4x in 2021 to a projected 3.8x in 2022, then to a projected 3.6x in 2023.

Shaath has also raised his expectations in relation to adjusted EBITDA, shifting his 2022 projection from $338 million and a 38.6 per cent margin to $347 million and a 39.1 per cent margin, while his 2023 forecast increased from $349 million and a 39.5 per cent margin to $382 million and an implied margin of 41.2 per cent, with net benefits of three and nine per cent in place for 2022 and 2023, respectively.

In terms of valuation, Shaath projects the company’s EV/EBITDA multiple to drop from the reported 11.5x in 2021 to a projected 9.7x in 2022, then to a projected 8.8x in 2023.

Shaath also forecasts good news for investors, as he raised his EPS projections to $8.14/share in 2022 and $9.50 in 2023, while lowering his P/E multiple projection from 28.6x in 2021 to 21.8x in 2022, then to 18.6x in 2023.

The Tuesday lift in CJT shares brought the stock to about even over the last 12 months. The announcement also helped Cargojet jump to about a 14 per cent return since the start of 2022, with its high point for 2022 being $185.54/share on January 19.