Presentation Flashcards
Introduction
Cargojet leads Canada’s freight industry, so we recommend a buy with a 12 month target price of $150, a 23% upside from its close price in January of 2024. Our recommendation is backed up by three theses points: strong market position, high operating leverage, and exceptional ability to generate returns.
Thesis Point II
Our second thesis is how CJT’s strong operating leverage and growth will drive margin expansion.
Amazon is ready to capitalize on Canada’s growing ecommerce potential due to its historical low e-commerce penetration and now its rising transition to online shopping. Industry experts reiterate the attractiveness of the Canadian ecommerce market.
Next, DHL makes up 95% of CJT’s ACMI business and expects $2.3 billion in revenue over the next seven years which is driven by Southeast Asia and Latin America through major marketplaces Shopee and Mercado Libre.
Combined with these growth strategies, CJT’s 85% fixed cost structure minimizes the need for major fleet or facility investments, further strengthening its solid operating leverage.
How Does CJT have a stable revenue source
- fixed direct costs
- expect what the costs are - variable costs covered by customers
- fuel & airport fees
- don’t have to worry about fluctuation operational costs
What are the Key Customers of CJT
Amazon, DHL , Canada Post, Purolator
Thesis Point III
- shift to profitability & cash flow generation which drives ROIC improvement
- cash flows will go directly to shareholders (increase dividends & active NCIB program)
Valuation & Revenue Growth (DHL): Appendix 4
Domestic: projected 6.6% which is aligned w/ Canadian e-commerce growth
ACMI Business: 12% CAGR, reflects DHL’s expansion
Charter (rent/lease aircraft): expected to decrease due to normal demand levels
Valuation & Strategic Shift
- minimize fleet investments needed due to excess capacity
- management cancelled 777 freighters and listed capital on sale (reduce capex)
- greater free cash flow and return on invested capital - greater capital puts more money in NCIB buyback and dividend increase signal positive market reception
Cautious growth forecast for CJT in ACMI (DHL)
- porejcted CJT’s ACMI will grow at 12% CAGR
Uncertainties in LatAM - there was a surge in demand for CJT b/c of Canadian government (PPE & medical tools) and Hawaiian wildfires
- growth in ACMI will not be sustainable
Risk #3: Heightened International Competition
- biggest customers have dedicated air freight businesses through ACMI agreements w/ other airlines (DHL & Amazon)
–> scared that this limits CJT”s ability to extend to high-growth areas like e-commerce - problem w/ domestic growth b/c of Canada’s new cargo market and limited competition
Mitigations
- expect CJT to capitalize on DHL’s growth in SEA and LatAM
–> b/c they work with them
- strong customer relationships & ACMI agreements
Why are we sure that DHL and Amazon won’t overtake CJT in freight industry
- ACMI agreements
- is more cost-effective and strategic efficient to use the resources and CJT’s specialization in overnight air cargo services
Figure 17: Amazon’s Expansion in Canada (Risk #3)
Two Perspective Interpretation
Costs
- Amazon is establishing itself in an emerging ecommerce market which will take away
Should we be concerned about DHL’s 95% hold on Cargojet’s ACMI (Warnats)
- aligned interests
- guaranteed revenue
Conclusion:
- these points show that they want cargojet to make profit with them
- eventually they’re warrants to turn into share price
Warrants w/ Amazon and DHL
- warrant w/ major ecommernce and logistics company gives competitive advantage
1. barrier to exit - discourages them from switching to competitors
2. enhanced international credibility - amazon and DHL are recognized internationally
- CJT gains reputation and builds trust w/ other potential customers
3. they can purchase shares at a lower price - they want cargojet to do good
Environmental
- committed to net zero
- carbon capture reduces the emissions in the atmosphere
–> In this storage places underground which are developed by underground
–> began after 2020 with their aircraft - fleet modernization
- limit the use of unrelated customer flying hours - SAF
- although is costly, cargo jet can compensate with its revenue
- not much major costs b/c of their well-established capex
what is STIP
short term investment plan
- compensation and salary base for executives
- shareholder’s return & growth signals
