Strong Year-on-Year Operating Results and Free Cash-Flow: Cargojet Inc. (TSX: CJT) operates a domestic overnight air cargo co-load network which provides dedicated aircraft to its Customers, Crew, Maintenance, and Insurance basis, operating between points in Canada and the USA. As on 12 May 2020, the market capitalization of the company stood at $2.11 billion.

Decent Increase in Revenue and EBITDA: During the quarter ended 31 March 2020, Cargojet Inc. reported strong operating results, wherein it reported a YoY increase of 11.4% in total revenue to CAD123 million and a growth of 24.5% in adjusted EBITDA to CAD40.2 million. In the same time span, gross margin of the company went up to CAD32.2 million, reflecting an increase of 51.9% on the previous year. The increase in results was mainly due to the diversification strategy of the company and its focus on other lines of business such as ACMI and All-in Charters, which paid off with strong growth with a strong contribution to overall margins. The Board of Cargojet Inc. has declared a cash dividend of CAD0.2340 per common voting share and will be payable on or before 6 July 2020.

Approval to Increase Permitted Foreign Ownership Levels: The company has recently announced that the Ontario Superior Court of Justice has approved the plan of arrangement to align the permitted level of non-Canadian ownership and control of its voting shares. Under the amendments, the Government of Canada has increased the permitted level of foreign ownership from 25% to 49%. This will entice more foreign investment and will promote growth in the aviation sector. However, the Canada Transportation Act has capped voting ownership and control at 25%.

Valuation Methodology: EV/EBITDA Multiple Based Relative Valuation (Illustrative)

EV/EBITDA Multiple Based Approach (Source: Refinitiv, Thomson Reuters)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The company’s Domestic Overnight e-Commerce Business has maintained its growth trajectory and its diversification strategy with other lines of business has paid off with decent growth in financial performance. The stock of CJT gave a return of 15.76% in the past three months and a return of 20.19% in the past one month. During the quarter ended 31 March 2020, gross margin of the company witnessed a slight decline and stood at 26.2% from 29.8% in the previous quarter. In the same time span, EBITDA margin of the company was 31.1%, higher than the industry median of 8%. It is trading close to its 52-weeks’ high level of CAD142.22 and we believe that it holds some further potential to add money to the pocket of investors. Considering the returns in the past one month, trading levels, decent financial performance and diversification in the portfolio, we have valued the stock using EV/EBITDA multiple based illustrative relative valuation method and arrived at an upside of mid-single-digit (in percentage terms). For the said purposes, we have considered Blue Dart Express Ltd, Spirit Airlines Inc and JetBlue Airways Corp as peers. Hence, we recommend a ‘Hold’ rating on the stock at the current market price of CAD135.5, down by 3.4625% on 12 May 2020.

CJT Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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