On Tuesday, Cargojet Inc. (TSX:CJT) (OTC:CGGJF) shares received a bullish update as Scotiabank raised its price target on the company's shares to C$160 from C$145, while reiterating a Sector Outperform rating.
This adjustment follows Cargojet's announcement of a lucrative multi-year contract with China-based Great Vision HK Express, valued at C$160 million, to provide scheduled charter services linking China and Canada. The deal aims to capitalize on the burgeoning fast-fashion e-commerce sector, which features prominent brands like Temu, SHEIN, Alibaba (NYSE:BABA), and TikTok.
The significance of this international deal, according to Scotiabank, lies in Cargojet's ability to execute it without the need for additional capital expenditures. Moreover, the contract has the potential to enhance the company's domestic revenue, which is expected to contribute to a higher return on invested capital (ROIC).
Scotiabank also pointed out the possibility of extending the contract beyond its current expiration in 2027, noting that such extensions are commonplace for Cargojet, drawing from the company's history of prolonged major contracts over the past two decades.
The contract, which was unveiled after Cargojet's April 2024 outlook, is seen as mostly incremental. In response to the new deal, Scotiabank has revised its financial estimates for Cargojet.
The new price target of C$160 is based on a conservative enterprise value to earnings before interest, taxes, depreciation, and amortization (EV/EBITDA) multiple of 9.0x. This multiple is within the range of Cargojet's pre-pandemic multiples, which varied from 7.5x to 15x.
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