Short seller bets against Canada’s largest cargo airline
A London-based hedge fund is betting against Cargojet , Canada’s largest cargo airline, citing concerns about the company’s aging fleet, accounting practices, and leadership style. Edgar Allen, founder and chief investment officer of High Ground Investment Management, revealed his firm’s bearish stance on Cargojet during the Sohn investment conference on Nov. 20. The Ontario-based air cargo company, founded by executive chairman Ajay Virmani in 2002, operates a fleet of 41 aircraft and employs nearly 1,900 people . The firm is believed to dominate Canada’s air cargo market with a more-than 80% share. Yet, according to Allen, two-thirds of air freight is actually carried on commercial passenger airlines, which are “completely price insensitive.” This means raising prices to improve profitability is challenging, if not impossible, for Cargojet as its customers are likely to flock to cheaper alternatives, according to the hedge fund manager. “If you didn’t know anything about cargo airlines, you’d think that they were terrible businesses. They’re undifferentiated, they’re [a] commodity, they’re unbranded, they’ve got low barriers to entry,” Allen told an audience of professional investors in London. CJT-CA 1Y line While acknowledging Cargojet’s dominant position in Canada’s overnight delivery market, Allen raised what he perceives to be red flags about the company’s fleet age and accounting practices. He pointed out that Cargojet’s aircraft are, on average, 30 years old – significantly older than competitors like United Parcel Service (21 years) and Federal Express (19 years) — and that most commercial aircraft are retired after 24 years of service. Allen also claimed that the company has failed to update the age of its aircraft fleet. Cargojet’s “Management’s Discussion and Analysis of Financial Condition and Results of Operations” report, released alongside its quarterly financial results, has listed the same values for the “average age” of its aircraft since the first quarter of 2023. Cargojet did not respond to multiple requests for comment from CNBC Pro. The short-seller’s most serious allegations are centered on Cargojet’s accounting practices, particularly regarding tax payments and aircraft depreciation. “They’ve got a very cunning way of avoiding tax,” Allen claimed. “They show the tax authorities completely different accounts for the ones that show us.” “And in these accounts, they don’t make any money at all,” he added. CNBC was unable to verify this information. ‘Unique business model and market position’ However, several Wall Street analysts paint a very different picture of Cargojet’s prospects. Konark Gupta from Scotiabank maintains a positive outlook on the stock, giving it a price target of 174 Canadian dollars ($123), representing 43% upside from current levels. Gupta acknowledged some near-term challenges but said he views recent stock weakness as “a buying opportunity,” citing the company’s “unique business model and market position” in a note to clients. The Toronto-listed shares of the company have struggled this year, posting a 2% gain while the broader Canadian stock market has risen by nearly 25%. The stock has fallen around 4% since Allen’s Sohn presentation. Walter Spracklin, an equity analyst from RBC Capital Markets, is even more optimistic on the stock, setting a price target of 189 Canadian dollars, which gives it 56% upside. Spracklin highlighted strong volume growth and robust peak season demand. However, BMO Research analyst Fadi Chamoun, one of two analysts with a “hold” rating on the stock, struck a more cautious tone, citing concerns about inflationary pressures in the aviation sector. “While management has several opportunities to improve productivity, we sense that inflationary pressures in the aviation ecosystem will likely put pressure on [adjusted earnings] margins in the coming years,” Chamoun said in a note to clients. The analyst’s 120 Canadian dollar price target points to a 1.3% downside for the stock. At the time of Allen’s presentation slide titled “Cargojet is expensive,” the stock was trading at 27 times earnings and 3.5 times tangible book value. In comparison, traditional airline Lufthansa trades at 7 times earnings, and United Airlines is valued at 9 times earnings estimate. The hedge fund manager believes Cargojet is still too rich on these valuation metrics despite this year’s lackluster share price performance. Allen also drew attention to Virmani’s high-profile lifestyle and connections, including his relationship with music star Drake, whose private jet bears the Cargojet name. “Rather like Tesla is a bet on Elon Musk, Cargojet really is a bet on Mr. Virmani,” Allen observed.