Aramex growth to resume this year

Positive GDP and trade activity in the Mena region allows Aramex to leverage its dominant position. (XAVIER WILSON)

Dubai-based logistics solutions provider Aramex's top line growth is likely to resume this year, buoyed by the five per cent jump in its revenues to Dh524 million during the fourth quarter last year, according to a report released by Mac Capital Advisors.

"Negative market sentiment stemming from the recent credit issues has created a buying opportunity and we expect share price strength in Aramex as investors pay up for stocks with a high level of earnings quality," the report titled 'Outlook and Strategy, Q1 2010' said, maintaining its overweight recommendation on Aramex.

We are updating our coverage of Aramex, maintaining our overweight recommendation and 12-month price target of Dh2.52, in light of the company's stable funding structure, high cash flow generation and growth orientated business model, the report said.

Aramex closed unchanged at Dh1.64 on the Dubai Financial Market (DFM) yesterday. "Our 12-month target of Dh2.52 per share implies a forward price/earnings ratio (P/E) of 10.9x in one year's time, which we believe is more than justified for a strong cash flow generating company with a defensive business model and leverage to global growth, in particular emerging market regions," the report said.

As a bonus for liquidity and support for valuation, Aramex has Dh0.32 worth of cash per share on its balance sheet. Upcoming price catalysts include global GDP rates, acquisition announcements and transport spot prices, it said.

The report added Aramex has developed an asset light business model, with low ownership of fixed warehouse and transportation assets, leading to a 50 per cent share of variable (versus fixed) costs and low ongoing capital expenditure obligation.

During 2009, the drop in GDP, trade and demand for logistics has significantly slowed Aramex's top line volume. However, the company's flexible cost base and supplier contracts (airline, rail and road suppliers) aligned with falling market rates, has led to an expansion of gross margins, more than offsetting declines in revenue. Thus, the company's asset light model has shielded earnings from the impact of slowdown in trade activity.

The report said Aramex has a leadership position in the Middle East North Africa (Mena) logistics industry which is expected to experience an exponential pace of growth over the long term to reach $27 billion in 2012, on the back of rising foreign investment and government policies favouring economic expansion.

The logistics industry growth in the region has been supported by an increasing number of free zones and the trend of outsourcing non-core functions including courier and logistics by SMEs, the report said.

For instance, Aramex recently signed an agreement with telecom major Vodafone Qatar to provide integrated logistics services. The region is also attracting significant interest from MNCs and small business start-ups as regional headquarters, contributing to logistics demand, it said.

Going forward, we believe that the Mena region will continue to be the most significant geography for Aramex, allowing it to leverage on its dominant position as GDP and trade activity trends are positive, it said.

Aramex is actively pursuing acquisitions in emerging markets, particularly Asia, which may act as a share price catalyst depending on size, valuation and strategic fit. In Decemebr last year, Aramex entered into a joint venture with Delmege Forsyth Group of Sri Lanka, to provide supply chain services in that country.

Going forward, we believe that a strong balance sheet and cash of Dh423m provides ample capacity for Dh1.3 billion worth of acquisitions during 2010, the report said. Aramex has recently added the Dubai Metro to its express delivery network in Dubai. The Dubai Metro will complement Aramex's delivery network and help it in bringing down costs and improving efficiencies.

Aramex has also started work on its new centre in Dubai Logistics City. Expected to be completed in first quarter of 2011 at a cost of Dh120m, the new logistics centre will have a capacity for more than 40,000 pallets locations. However, the report said the GCC constitutes about 70 per cent of Aramex's revenue, and any downturn in regional economy would severely impact its revenue segments. Other risks include exchange rate exposure and growing competition from global logistics players in Middle East.

"Aramex is trading at 11.7x 2009 estimated EPS (earning per share), at a deep discount of 39 per cent to the industry average of 19.4x," the report said after doing a peer analysis comparing Aramex with other global logistics players.

 

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