Aramex. Waiting for Expansions to Roll Out. Flash Note 17 May 2010

Transcription

1 Research Department UAE - Transport & Logistics Aramex Flash Note 17 May 2010 Waiting for Expansions to Roll Out 2010e shaping up to be another relatively strong year with underlying margin trend holding up and volumes recovering Implementation of expansion strategy to commence soon Maintain Buy recommendation and TP of AED2.07/share Aramex s margin story is still relatively intact with volumes improving. Aramex remains a beneficiary of excess airline capacity in the region. Although 1Q10 headline gross margin eased 266bps YoY and 71bps QoQ, the drop is not alarming as it was primarily due to a change in revenue mix with the relatively lowmargin freight forwarding business rebounding 24% YoY to 41% of sales versus 38% a year earlier. Freight forwarding margins eased 405bps YoY and 152bps QoQ, which is customary given volume discounts typically offered to clients. We raised our 2010e revenue by 4% and net income 3% mainly to account for a stronger recovery in the freight business. Acquisitions and other expansions through greenfield JVs with local partners will be the next chapter in the Aramex story, capitalizing on its AED500 million cash balance and nearly debt-free balance sheet. Shanghai-listed Sinotrans Air Transportation Development announced earlier this month that it will establish a JV with Aramex with start-up capital of c.usd3 million, granting Aramex strong access to China s express market. Aramex is yet to make a formal announcement on the JV. Aramex is hoping to have presence in at least 10 new markets in Africa and the CIS in the next two years. We like that management is not inclined to utilize the majority of the company s resources on a single investment, opting instead for relatively small investments (typically not more than USD30 million each), which grant them a decent entry point into their country of choice. Aramex is also still on track with its logistics expansions with the AED120 million facility at Dubai Logistics City their largest ticket item. Most other warehouse investments will be JVs with a local partner (similar to the JV with Oman s Zubair Corporation) that will serve as an anchor tenant for the facilities upon completion, providing a stable revenue stream for Aramex while sharing construction costs. We maintain our Buy recommendation and target price of AED2.07/share (adjusted for recent 1:10 stock dividend), which offers a 34% upside to the current market price. The stock is trading at a discount to peers of 20% on P/E (10e) and 14% on EV/EBITDA (10e). It is trading below its historical average P/E of 14-16x and its historically justified premium to peers (c.20%). The share price performance has been relatively muted recently in light of the UAE macro overhang and reaching the foreign ownership limit. A key catalyst is rollout of expansion plans through partnerships and acquisitions on the freight, express, and logistics fronts. Other drivers include strong growth in Aramex s volumes and further validation of the underlying margin trend. Buy Target Price (AED) 2.07 Market Price (AED) 1.55 Upside 33.8% Listed on Bloomberg Code RIC DFM ARMX UH ARMX.DU Ent. Value (AED mn) 1,808 Net Debt (AED mn) (496) Market Cap. (AED mn) 2,269 Market Cap. (USD mn) 618 Number of Shares (mn) 1,464.1 Foreign Ownership Limit 49.0% Foreign Ownership Level 48.1% Daily Turnover (USD mn) 1.8 Daily Turnover (AED mn) 6.6 Shareholders Structure Free Float 55.0% Levant Logistics 9.9% Mashreq Capital Ltd. 5.6% Others 29.5% Price Performance Chart ARMX DFMGI J F M A M J J A S O N D J F KPIs (AED mn) New Old Consensus 2010e 2011f 2010e 2011f 2010c 2011c Revenues 2,187 2,494 2,100 2,390 2,117 2,390 EBITDA EBITDA Margin 12.5% 11.9% 13.1% 12.9% 13.4% 12.7% Net Income EPS Hatem Alaa EPS Growth 8% 6% 6% 14% 8% 11% P/E 11.43x 10.87x 11.79x 10.30x 11.43x 10.32x EV/EBITDA 6.60x 5.83x 6.51x 5.59x 6.38x 5.94x halaa@hc-si.com P/BV 1.28x 1.19x 1.31x 1.18x 1.35x 1.26x FCF Yield 3.0% 6.2% 5.0% 5.4% - - * Disclaimer: See page 5 a = actual; e/f = HC s estimates/forecasts; c = consensus estimates Aramex 1

2 Table 1: Aramex s 1Q10 Results AED million 1Q10a 1Q09a YoY 4Q09a QoQ 1Q10e Dev. Revenue % % % Cost of Service (241) (199) 21.4% (235) 2.6% (225) 7.4% Gross Profit % % % Gross Margin 54.5% 57.1% 55.2% 56.0% SG&A Expenses (117) (106) 9.4% (119) -2.1% (117) -0.4% Other Operating Expenses (106) (98) 7.7% (106) 0.1% (104) 1.8% EBITDA % % % EBITDA Margin 12.5% 12.9% 12.3% 12.7% Depreciation (12) (11) 8.5% (10) 18.1% (13) -6.5% Net Interest Income % % % Other Income 0 1 (2) 1 - Pre-Tax Income % % % Taxes (3) (2) 35.4% (1) 352.2% (3) 0.7% Pre-Minority Net Income % % % Minority Interest (7) (6) 17.3% (6) 25.5% (7) 2.1% Net Income % % % Net Margin 9.0% 9.3% 9.4% 8.7% Source: Aramex, HC Research Table 2: Aramex s 1Q10 Breakdowns by LoB AED million 1Q10a 1Q09a YoY 4Q09a QoQ 1Q10e Dev. Domestic Express Revenue % % % Cost of Service (19) (16) 16.9% (19) 1.2% (17) 9.4% Gross Profit % % % Gross Margin 77.4% 78.8% 76.6% 78.5% International Express Revenue % % % Cost of Service (54) (51) 4.9% (51) 4.5% (53) 1.7% Gross Profit % % % Gross Margin 67.3% 66.1% 68.7% 67.3% Freight Forwarding Revenue % % % Cost of Service (154) (117) 31.4% (145) 6.3% (137) 13.0% Gross Profit % % % Gross Margin 28.7% 32.7% 30.2% 30.9% Logistics Revenue % % % Cost of Service (5) (6) -2.7% (10) -43.4% (7) -23.8% Gross Profit % % % Gross Margin 80.0% 81.3% 69.8% 78.8% Others Revenue % % % Cost of Service (9) (8) 7.6% (11) -14.2% (11) -18.6% Gross Profit % % % Gross Margin 76.7% 73.7% 74.4% 70.8% Source: Aramex, HC Research Aramex 2

3 Forecasts by LoB AED million 2009a 2010e 2011f 2012f 2013f 2014f Domestic Express Revenue Growth 2.2% 12.2% 17.4% 15.9% 13.0% 11.5% Cost of Service (66) (77) (91) (108) (124) (140) Gross Profit Gross Margin 78.2% 77.2% 77.1% 76.6% 76.2% 75.9% Contribution to Revenue 15.4% 15.5% 16.0% 16.1% 15.8% 15.5% Contribution to Gross Profit 21.3% 22.0% 23.1% 23.6% 23.6% 23.4% International Express Revenue ,007 1,133 Growth 2.7% 7.9% 14.8% 14.3% 13.4% 12.6% Cost of Service (201) (224) (284) (347) (412) (481) Gross Profit Gross Margin 67.9% 66.8% 63.5% 61.0% 59.1% 57.6% Contribution to Revenue 32.0% 30.9% 31.1% 30.9% 30.6% 30.1% Contribution to Gross Profit 38.4% 38.1% 37.1% 36.1% 35.3% 34.5% Freight Forwarding Revenue ,000 1,162 1,349 1,568 Growth -16.9% 17.3% 12.4% 16.2% 16.1% 16.2% Cost of Service (519) (634) (716) (835) (972) (1,134) Gross Profit Gross Margin 31.7% 28.7% 28.4% 28.2% 27.9% 27.7% Contribution to Revenue 38.7% 40.7% 40.1% 40.4% 40.9% 41.6% Contribution to Gross Profit 21.7% 21.5% 21.4% 21.9% 22.4% 23.0% Logistics Revenue Growth -6.2% -6.4% 18.9% 20.0% 21.1% 22.2% Cost of Service (29) (24) (30) (37) (45) (56) Gross Profit Gross Margin 76.8% 79.3% 78.2% 77.7% 77.4% 77.3% Contribution to Revenue 6.3% 5.3% 5.6% 5.8% 6.1% 6.5% Contribution to Gross Profit 8.6% 7.8% 8.1% 8.6% 9.2% 10.0% Others Revenue Growth 15.5% 11.2% 9.6% 9.4% 9.2% 9.0% Cost of Service (38) (39) (45) (51) (58) (66) Gross Profit Gross Margin 74.1% 76.2% 75.2% 74.2% 73.2% 72.2% Contribution to Revenue 7.6% 7.6% 7.3% 6.9% 6.6% 6.3% Contribution to Gross Profit 9.9% 10.6% 10.3% 9.8% 9.4% 9.0% Aramex 3

4 Financial Statements AED million 2009f 2010e 2011f 2012f 2013f 2014f Income Statement Revenue 1,961 2,187 2,494 2,876 3,296 3,765 Revenue Growth -5.7% 11.5% 14.1% 15.3% 14.6% 14.2% Cost of Service (853) (1,000) (1,166) (1,377) (1,612) (1,876) Gross Profit 1,108 1,187 1,329 1,499 1,683 1,889 Gross Margin 56.5% 54.3% 53.3% 52.1% 51.1% 50.2% SG&A Expenses (458) (487) (552) (626) (709) (801) Other Operating Expenses (399) (426) (486) (545) (611) (687) Share of JV Results EBITDA EBITDA Margin 12.8% 12.5% 11.9% 11.6% 11.2% 10.8% EBITDA Growth 14.8% 9.2% 8.0% 12.6% 11.1% 10.1% Depreciation (45) (53) (64) (73) (79) (86) Net Interest Income Other Income (0) Pre-Tax Income Taxes (11) (14) (15) (17) (19) (21) Net Income Before Minority Interest Minority Interest (22) (26) (26) (29) (33) (37) Net Income Before Appropriations Net Margin 9.4% 9.1% 8.5% 8.2% 8.1% 7.9% Net Income Growth 25.1% 7.7% 6.2% 12.4% 12.6% 11.4% Appropriations (2) (2) (2) (2) (3) (3) Net Income After Appropriations ,961 2,187 2,494 2,876 3,296 3,765 Balance Sheet Cash ,053 Receivables Other Current Assets Total Current Assets ,108 1,263 1,481 1,720 Property Plant & Equipment Goodwill and Other Intangibles Other Non-Current Assets Total Non-Current Assets 1,120 1,277 1,319 1,351 1,344 1,341 Total Assets 2,058 2,266 2,426 2,614 2,826 3,061 Short-Term Debt Payables Distributions Payable Other Current Liabilities Total Current Liabilities Long-Term Debt Other Long-Term Liabilities Total Long-Term Liabilities Shareholder Equity 1,624 1,767 1,913 2,081 2,270 2,480 Cash Flow Statement Net Income Before Minority Interest Non-Cash Items Net Change in Working Capital 9 (36) (37) (43) (49) (56) Operating Cash Flows Net CAPEX (49) (155) (100) (99) (66) (75) Other Investments (32) (55) Investing Cash Flows (81) (210) (100) (99) (66) (75) Financing Cash Flows (46) (33) (87) (91) (102) (115) Change in Cash 154 (1) Aramex 4

5 Rating Scale Recommendation Upside Buy Greater than 20% Hold -5% to 20% Sell Less than -5% Disclaimer This memorandum is based on information available to the public. This memorandum is not an offer to buy or sell, or a solicitation of an offer to buy or sell the securities mentioned. The information and opinions in this memorandum were prepared by HC Brokerage from sources it believes to be reliable and from information available to the public. HC Brokerage makes no guarantee or warranty to the accuracy and thoroughness of the information mentioned in this memorandum, and accepts no responsibility or liability for losses or damages incurred as a result of opinions formed and decisions made based on information presented in this memorandum. HC Brokerage does not undertake to advise you of changes in its opinion or information. HC Brokerage and its affiliates and/or its directors and employees may own or have positions in, and effect transactions of companies mentioned in this memorandum. HC Brokerage and its affiliates may also seek to perform or have performed investment-banking services for companies mentioned in this memorandum. Aramex 5

6 HC Research Karim Khadr Regional Head of Research Tudor Allin-Khan, CFA Chief Economist/Strategist tudor.allin-khan@af-hc.com Amr Abdel Khalek Economist aabdelkhalek@hc-si.com Nadine Weheba Economist nweheba@hc-si.com NematAllah Choucri Telecoms nchoucri@hc-si.com Sarah Shabayek Telecoms sshabayek@hc-si.com Germaine Benyamin Banks & Financials germaine.benyamin@af-hc.com Janany Vamadeva Banks & Financials janany.vamadeva@af-hc.com Hatem Alaa Industrials halaa@hc-si.com Mennatallah El Hefnawy Industrials melhefnawy@hc-si.com Mai Nehad Industrials mnehad@hc-si.com Majed Azzam Real Estate majed.azzam@af-hc.com Ankur Khetawat Real Estate ankur.khetawat@af-hc.com Nermeen Abdel Gawad Real Estate ngawad@hc-si.com Lovetesh Singh Petrochemicals & Fertilizers lovetesh.singh@af-hc.com Rehaam Romero Editor rromero@hc-si.com Mohamed El Saiid, MFTA Head of TA Research msaeed@hc-si.com (Ext. 175) Wael Atta, CFTe Senior Technical Analyst wael.atta@af-hc.com Sameh Khalil, CFTe Technical Analyst skhalil@hc-si.com (Ext. 361) HC Brokerage Cairo, Egypt salesandtrading@hc-si.com Shawkat El-Maraghy Managing Director selmaraghy@hc-si.com Ext. 200 Mostafa Saad Local & Gulf Sales msaad@hc-si.com Ext. 213 Yasser Mansour Local & Gulf Sales ymansour@hc-si.com Ext. 217 Hossam Wahid Local & Gulf Sales hwahid@hc-si.com Ext. 206 Hassan Kenawi Local & Gulf Sales hkenawi@hc-si.com Ext. 300 Abou Bakr Shaaban Local & Gulf Sales ashaaban@hc-si.com Ext. 238 Nihal Hany Local & Gulf Sales nhany@hc-si.com Ext. 219 Mohamed Helmy Foreign Sales mhelmy@hc-si.com Ext. 207 Ahmed Nabil Fixed Income Trader anabil@hc-si.com Ext. 218 HC Brokerage Dubai, UAE Hassan Aly Choucri General Manager hassan.choucri@af-hc.com Mohamed Hegazy Head of Sales mohamed.hegazy@af-hc.com Mohamed Galal Head of Sales Trading mohammed.galal@af-hc.com Anne Marie Browne Foreign Institutional Sales annemarie.browne@af-hc.com Richard Frost Foreign Institutional Sales richard.frost@af-hc.com Aramex 6