Aramex (ARMX.DU) A Regional Brand on a Global Mission Equity Research Initiation Coverage May 27th, 2008 Current Price: AED 2.55 Country: United Arab Emirates Fair value Target: AED 3.08 Sector: Logistics Recommendation: BUY Exchange: Dubai Financial Market • From a small express wholesaler for the Middle East, Aramex has evolved to a Middle East focused worldwide provider of integrated supply chain solutions. The company has more Sector Coverage Team recently embarked upon an aggressive expansion strategy to position and retain its place amongst the leading players of the industry, and capitalizing on a Global Distribution Alliance, Kareem Z. Murad in which it is one of the largest members. +9714 3199 757 • While remaining an asset light operation, Aramex has nevertheless grown to incorporate [email protected] 307 offices in 195 cities, employing over 7,000 employees and serving a client base of over 50,000 companies, based mainly in the ME, Europe, India and America. The asset light nature Rasha Hamdan, CFA, FRM of the operation has kept CAPEX of less than 5% of revenues, although an increasingly active +9714 4283 525 acquisition strategy should utilize much of the company’s cash and impact its capital structure [email protected] going forward. • Aramex retains a significant competitive advantage within its core market of the Middle East. The company is targeting further geographic expansion in an effort to set up a robust global network, however, the Middle East region is likely to remain the dominant region, and hence should be the main growth driver for the company for the foreseeable future. In light of this, we anticipate that Aramex will continue to witness double digit growth for our forecast period, driven by high and sustained regional growth in economic activity, increased trend of outsourcing supply chain management solutions, continued reduction in trade barriers in the region, significant expenditure on the region’s transportation infrastructure and Aramex’s ability to capitalize on all the above trends. • While the current stock price seems to already incorporate expectations of growth, we believe that it does not fully capture the inherent sustainability of anticipated double digit growth or the potential benefits of prudent and targeted geographic expansion, or the potential returns from leveraging the brand. We initiate coverage on Aramex with a BUY recommendation based on a fair value target of AED 3.08 per share, implying an upside potential of 21% from the current levels of AED 2.55 per share. Net profits BVPS EPS RoAE RoAA P/E P/B Year (AED '000) (AED '000) (AED '000) (%) (%) (x) (x) Dec 10E 209,789 1.23 0.17 14.5% 9.9% 14.71 2.08 Dec 09E 178,082 1.16 0.15 13.1% 9.2% 17.33 2.20 Dec 08E 148,318 1.10 0.12 11.4% 8.4% 20.80 2.32 Dec-07 121,552 1.17 0.11 10.0% 7.6% 23.08 2.18 Aramex stock performance vs. SC UAE Index rebased 4.00 52 - week range (AED) 2.43-3.35 3.50 Number of shares ('000) 1,210,000 3.00 2.50 Free float (%) 55% 2.00 Market Cap (AED '000) 3,085,500 1.50 Market USD '000) 840,049 1.00 0.50 Div Yld. 2007 (%) 0% - Jul-07 Jan-07 Jan-08 Jun-07 Apr-07 Apr-08 Oct-07 Feb-07 Feb-08 Sep-07 Mar-07 Mar-08 Dec-07 Nov-07 Aug-07 May-07 May-08 Aramex SC UAE Index rebased Aramex Contents INVESTMENT HIGHLIGHTS .........................................................3 COMPANY OVERVIEW ................................................................4 THE StartING POINT .......................................................................................................................................... 4 TIMELINE .............................................................................................................................................................. 5 THE GLOBAL DISTRIbutION ALLIANCE (GDA) AND ITS ROLE ........................................................................ 5 ArameX buSINESS MODEL ............................................................................................................................... 6 NON ASSET-BASED COMPANY ........................................................................................................................... 6 GLOBAL REACH .................................................................................................................................................... 7 ORGANIZatION STRUCTURE ............................................................................................................................... 7 THE maNagemeNT ............................................................................................................................................. 7 OWNERSHIP STRUCTURE: ................................................................................................................................... 8 PRODUCT FOCUS ...............................................................................................................................................13 MARKET ANALYSIS ..................................................................22 THE COMPETITION .............................................................................................................................................22 GROWTH DRIVERS .............................................................................................................................................23 THE GOALPOST .......................................................................29 IMPOrtaNT MILESTONES TO REACH THE GOALPOST ....................................................................................29 STEPS taKEN SO far .........................................................................................................................................30 SWOT ANalySIS ................................................................................................................................................33 RISKS ...................................................................................................................................................................33 FINANCIAL ANALYSIS AND FOrecAST: .......................................35 REVENUES: .........................................................................................................................................................35 NET PROFITS: ......................................................................................................................................................36 CAPEX AND LOANS ............................................................................................................................................37 PROSPECTS: ........................................................................................................................................................38 VALUATION: ...........................................................................39 FINANCIALS ...........................................................................41 APPENDICES ..........................................................................44 APPENDIX 1 - SOCIal reSPONSIBILIty AND COmmItmeNT .......................................................................44 APPENDIX 2 – ArameX raNKING IN TERMS OF marKET CAPItalIZatION ..............................................45 APPENDIX 3 – ArameX raNKING IN TERMS OF REVENUES ........................................................................46 APPENDIX 4 – ArameX raNKING IN termS OF Net INCOme ....................................................................47 May 27th, 2008 2 Aramex Investment Highlights • From a small express wholesaler for the Middle East, Aramex has evolved to a Middle East focused worldwide provider of integrated supply chain solutions, offering services that are at the heart of the business, such as express delivery, freight forwarding and warehousing, in addition to value added services that have complemented the company’s business model and accelerated its growth. • The company has more recently embarked upon an aggressive expansion strategy to position and retain its place amongst the leading players of the industry, and capitalizing on a Global Distribution Alliance, in which it is one of the largest members. It has also identified opportunities to leverage a well established brand and streamlined operations. • While remaining an asset light operation, Aramex has nevertheless grown to incorporate 307 offices in 195 cities, employing over 7,000 employees and serving a client base of over 50,000 companies, based mainly in the ME, Europe, India and America. The asset light nature of the operation has kept CAPEX of less than 5% of revenues, although an increasingly active acquisition strategy should utilize much of the company’s cash and impact its capital structure going forward, from virtually no debt today. • As an integrated service provider, Aramex retains three main revenue streams. They are freight forwarding (46% of total revenues), express (42% of total revenues) and other (12% of total revenues) as on 31 December 2007. We expect the mix to be retained at roughly the same levels going forward, assuming future acquisitions do not impact the mix materially. • Aramex retains a significant competitive advantage within its core market of the Middle East, which today represents over 65% of the company’s revenues. However the company is targeting further geographic expansion in an effort to set up a robust global network, targeting regions that have considerable trade activity with the region or in absolute terms,