Aramex is unique and poised for growth, says TNI report

Abu Dhabi, UAE, 22 January 2008: In an industry where the largest companies rely on their hold of aircraft and related fixed assets, Aramex stands out as exceptional, said a report released yesterday by The National Investor (TNI). The management insists on following a non-asset based approach which entails practically no leverage for the company. This might be in stark contrast with giants of the logistics industry but Aramex is convinced it is the right way to differentiate itself, the report found.

“The mission statement of the company is precise and leaves nothing for imagination. The management wants to make Aramex the fifth largest logistics company in the world. Their definition of competition is coverage and not sales or capitalization. With a steady stream of acquisitions, Aramex is on its way to achieving this mission,” stated Hassan Awan, the TNI investment research team member who prepared the report.

Organic growth is as important for Aramex as external growth. Over the last few years, the former has been going hand in hand with systematic acquisitions. With such acquisitions the company has penetrated geographical areas like Europe and Asia. The company has its eyes peeled for further expansion in Asia in particular, given the strong economic growth in countries like China.

Awan pointed out that revenues of the company have grown at a CAGR of 28% between 2002 and 2006. The advantage of this non-asset based approach is that Aramex is free to choose from a number of transporters when it needs to deliver its goods. Owning and running its own aircraft would deprive Aramex of such flexibility and would result in significant maintenance costs.

“Our Underpriced rating of Aramex is based on its successful yet differentiated business model and a growing industry. The Middle East is gaining ground in world logistics. It is one of the fastest growing markets in the world and Aramex is strategically placed to benefit from this boom. The company has clear goals, a different business model, comparatively faster growth rates and a smart acquisition strategy. Our DCF-based target price is AED 3.93, an upside of 32.7% to the current price of AED 2.96,” Awan concluded. The transportation sector index in the UAE consists of three companies, which can hardly be compared on financial or operational grounds (Gulf Navigation, Air Arabia and Aramex).

Aramex currently runs 304 offices in 192 cities around the world. There are certain geographical areas in Asia which are still untapped. Moreover, Aramex has a twofold approach when entering a new geographical market: 1/compete with the existing logistics companies or 2/create an “Aramex niche” in a highly competitive market where there are high barriers to entry.

The US presence of Aramex is the example of running a niche where the existing logistics network is gigantic. Aramex has a dedicated team which tracks opportunities for expansion into new markets. Acquisitions in markets like the US are meant to facilitate and sustain the company’s presence there. On top of the acquisitive agenda of Aramex are emerging markets like East Asia. The management is keen to acquire attractive companies in China and has specialists in the region who are looking for potential targets.

According to the report, Profit margins of Aramex have historically been quite stable though due to an expanding management team, operating margins have been squeezed at times. Margins also depend on the revenue mix because of the sharp difference in segmental profit margins. The revenue mix has been uniform over the last few years however it changed in 2006 following the acquisition of TwoWay Vanguard.

However, the report stressed that the gross margins across segments are substantially different because of the diverse nature of services offered by Aramex. Logistics is the most profitable segment as it primarily requires warehousing and storage. On the other hand, freight is the least profitable in terms margins because of the transportation involved. Although no figures have been released yet, but the TNI report expected the gross profit margin to rise in 2007 because of the growth in the international express segment.

The share of different segments in total revenue has been stable over time. Revenue composition does however change whenever there is a significant acquisition. Currently, most of the revenues come from the international express and freight segments. Going forward, Aramex plans AED 30-40m investment in the Logistics segment in 2009. The TNI report found that the resulting increase in capacity will boost revenues from the segment if there is adequate demand. “Increased revenue contribution from the Logistics segment could result in higher margins,” the report concluded.

About The National Investor: The National Investor (TNI) is a privately owned regional investment banking group. The firm comprises six strategic business units covering investment banking, private equity, asset management, real estate, investment research, and principal investments. In addition, the firm has an associate company, GNSC, which provides brokerage services as a registered member of the Abu Dhabi Securities Market (ADSM) and the Dubai Financial Market (DFM).