Strong Top-line Growth

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1 aramex Strong Top-line Growth August 17, 2011 key data Fair Value per Share 2.05 Closing Price (AED) * week High / Low (AED) 2.30/1.51 YTD / 12-month Return -15%/ 2% P/E 12.4 Shares Outstanding (Mn) 1,464 Market Cap (AED Mn) 2,577 Free Float 90% Reuters / Bloomberg Code ARMX.DU/ARMX UH *Price as of close of August 16, Sources: Bloomberg and NBK Capital key metrics 2010A 2011F 2012F 2013F EPS EPS Growth 11% 4% 10% 10% P/E Dividend Yield 4.3% 2.1% 2.3% 2.5% EV/EBITDA Revenue (Millions) 2,212 2,495 2,797 3,115 Revenue Growth 13% 13% 12% 11% EBITDA (Millions) EBITDA Growth 10% 9% 8% 10% EBITDA Margin 12% 12% 12% 11% Sources: Company financial statements and NBK Capital forecasts AED Millions 3Q2010A 2Q2011A 3Q2011F 4Q2011F Revenues EBITDA Source: NBK Capital Rebased Performance Highlights 12-Month Fair Value: AED 2.05 Recommendation: Accumulate - Risk Level: 3** Reason for Report: 2Q2011 Update Aramex witnessed a 16% year-on-year (YoY) increase in sales in 2Q2011 to AED 648 million with international express leading the way. This growth in sales was driven by improved fundamentals in the GCC (i.e., increased trade activity and retail spending) and the company s ability to increase market share. Moreover, smaller operations in Asia, Europe, and Africa recorded outstanding growth while Aramex s expanded e-commerce services and facilities pushed international express sales to new heights. Aramex is planning to spend up to USD 100 million over the next 12 to 18 months on acquisitions in Africa and Southeast Asia, thus taking one step closer to becoming the logistics company of the emerging markets. The uncertainty in the Middle East and North Africa (MENA) region has solidified management s strategy to diversify Aramex s geographic exposure. Aramex continues to maintain a strong balance sheet, with a cash balance of AED 408 million (AED 0.32 per share) and a negligible debt balance. The cash balance as of 1H2011 covers more than 70% of the capital requirements for the company s expansion plans. As a result, we feel that Aramex is capable of carrying out its expansion plans with ease. We upped our FY2011 forecasts to reflect the strong growth in sales. The unrest in the MENA region is not having as large of an impact on the top line as we had expected. Therefore, we increased sales to reflect 12.8% growth for FY2011. We increased our 12-month fair value estimate for Aramex s share price by 5% to AED 2.05 per share. Given that our fair value target is 16% above the latest market price, our recommendation for Aramex is Accumulate Aug-10 Nov-10 Feb-11 May-11 Aug-11 MSCI UAE Aramex Sources: MSCI, Bloomberg, and NBK Capital Analysts Samir Murad, CFA T E. samir.murad@nbkcapital.com Wadie Khoury T E. wadie.khoury@nbkcapital.com **Please refer to page 7 for recommendations and risk ratings. nbkcapital. com

2 Valuation Our 12-month fair value estimate for Aramex s share price increased by 5% and currently stands at AED 2.05 per share. The fair value derived from the discounted cash flow (DCF) valuation increased by 11%, while the value generated from the peer comparison method saw a decrease of 6%. Moreover, Aramex has AED 408 million in cash (AED 0.32 per share), which we feel is important considering the company is unlevered. Given that our fair value is 16% above the latest market price, our recommendation for Aramex is Accumulate. Figure 1 Fair Value per Share Valuation Method Old New Weight Value Weight Value Change Our new 12-month value for Aramex is AED 2.05 Discounted cash flow 70% AED % AED % Peer comparison 30% AED % AED % Weighted average fair value 100% AED % AED % Source: NBK Capital Improved fundamentals and market share gains led to growth in sales Aramex witnessed a 16% YoY increase in sales in 2Q2011 to AED 648 million. All of the company s business units contributed positively to this outcome, but international express led the way with a 22% increase in sales. This growth in sales was driven by improved fundamentals in the GCC (i.e., increased trade activity and retail spending) and the company s ability to increase market share. In addition, Aramex s relatively smaller operations in other markets (Asia, Europe, and Africa) registered solid growth in business activity. The international express segment benefited from the company s expansion of e-commerce services and facilities, which included additional warehouse capacity in New York and new China-based services. Figure 2 Revenue Breakdown by Region 2Q2009 2Q2011 North America 1.2% Asia 6.1% North America 1.6% Asia 9.9% Aramex s operations in Asia and Europe have shown strong growth. These regions are beginning to contribute a larger portion of the company s top line Europe 16.7% Middle East 76.0% Europe 20.0% Middle East 68.6% Sources: Aramex and NBK Capital nbkcapital. com 2

3 Gross profit margin declines due to lower international express margin Aramex has a strong track record of maintaining operating margins, even during periods of rising fuel prices. For the freight forwarding segment (41.8% of total revenue and a gross profit margin of 28.5% in 2010), any rise in fuel cost is passed on immediately to the client in the form of fuel surcharges. The international express segment (31.2% of total revenue and a gross profit margin of 66.8% in 2010) has a small lag, as prices are adjusted on a monthly basis. Overall, the impact on margins tends to be minimal. However, as we stated in our last update on Aramex, the gross profit margin (GPM) for international express was close to record highs in 2010 and that could lead Aramex to absorb some of the rise in fuel costs. In 2Q2011, the GPM for international express declined by 135 basis points YoY to reach 64.9%. Consequently, the drop in this division pulled the company s overall margin down 80 basis points YoY to reach 53% in 2Q2011. Management has indicated that they do not expect further declines in the international express segment s GPM and expect it to remain in the range of 64-65%. Figure 3 Gross Margins vs. Jet Fuel Prices % 66% 69% 68% 69% 67% 66% 67% 66% 65% 70% % 60% Jet fuel prices have increased 135% since the beginning of 2009, but Aramex has maintained relatively stable margins in the international express and freight forwarding divisions Dollars per Gallon % 33% 31% 30% 29% 28% 29% 29% 28% 28% 50% 40% 30% Gross Margin 20% % 1.0 0% 1Q2009 2Q2009 3Q2009 4Q2009 1Q2010 2Q2010 3Q2010 4Q2010 1Q2011 2Q2011 Jet Fuel Prices [LHS] International Express Gross Margin [RHS] Freight Forwarding Gross Margin [RHS] Sources: US Energy Information Association, Aramex, and NBK Capital Regional unrest moderately impacts the bottom line Although the regional unrest did not have much of an impact on sales, the issues revolving around Syria, Libya, and Egypt had a moderate impact on the company s bottom line. Net income grew 3% in 2Q2011 to AED 56.5 million; however, according to management, if profits in these three countries had remained stable YoY, net income would have grown by 11% in 2Q2011. Aramex s operations in Syria and Libya, though relatively small, remain our biggest concern for the company in On the other hand, operations in Egypt have been improving and are creeping up toward relatively normal levels. nbkcapital. com 3

4 Figure 4 Financial Performance AED '000 Second Quarter Common Size 2Q2010 2Q2011 Change Aramex continued to display strong growth in sales; however, the bottom line was moderately impacted by regional unrest International Express 172, , % 31.0% 32.6% Freight Forwarding 232, , % 41.8% 41.8% Domestic Express 83,743 92, % 15.0% 14.3% Logistics 25,631 26, % 4.6% 4.1% Others 42,183 46, % 7.6% 7.2% Total Revenue 557, , % 100.0% 100.0% Gross Profit 299, , % 53.8% 53.0% EBITDA 74,185 81, % 13.3% 12.6% Net Income 54,905 56, % 9.9% 8.7% Sources: Aramex and NBK Capital Strong balance sheet capable of supporting expansion plans Aramex continues to maintain a strong balance sheet, with a cash balance of AED 408 million (AED 0.32 per share) and a negligible debt balance. Over the next 12 to 18 months, Aramex is planning to spend up to AED 550 million on acquisitions and warehouse developments. The cash balance as of 1H2011 covers more than 70% of the company s expansion plans. Management has indicated that they are comfortable with a debt-to-equity ratio of 0.5x; however, we do not expect Aramex to reach such leverage in the short term. We feel that Aramex can carry out its expansion plans with ease. By the end of June 2011, Aramex reported an increase in working capital mainly due to an 18% jump in accounts receivables. Consequently, this pushed the trailing twelve months (TTM) days sales outstanding (DSO) to 73 days the highest level since Management attributes this increase in DSO to some slowdown in collection in some markets and the addition of a new client that was granted extended credit terms. Aramex monitors its receivables closely, and at the moment, we are not concerned by this increase. We expect the DSO to improve as the year progresses and head back toward historical levels. Figure 5 Days Sales Outstanding (DSO) An increase in working capital pushed the TTM DSO to 73 days TTM 2011 Days Sales Outstanding Sources: Aramex and NBK Capital nbkcapital. com 4

5 Aramex continues its pursuit to become the leading logistics player in emerging markets The uncertainty in the region has solidified management s strategy to diversify the company s geographic exposure. Aramex is planning to spend up to USD 100 million over the next 12 to 18 months on acquisitions in Africa and Southeast Asia. Africa remains of particular interest to Aramex, as the region shows strong growth prospects and is significantly underserved. The company is expecting to complete a major acquisition in South Africa. FY2011: Forecast revised upward to reflect improvement in sales We upped our FY2011 forecasts to reflect the strong growth in sales. The unrest in the MENA region is not having as large of an impact on the top line as we had expected. As a result, we increased sales to reflect 12.8% growth for FY2011 compared to our old forecast of 5.6% growth. We maintained margins on the gross profit and EBITDA levels at 52.8% and 12.1%, respectively. Essentially, we expect this to improve net income growth from our previous forecast of 2.9% to 4.5% growth. Figure 6 Actual vs. Forecasts Income Statement 2010 Actual 2011 Forecasts % Change vs. Old New 2010 A 2011 F (Old) Revenue 2, , , % 5.6% We upped our FY2011 sales growth forecast while maintaining operating margins Gross Profit 1, , , % 5.6% Gross Profit Margin 53.8% 52.8% 52.8% EBITDA % 4.8% EBITDA Margin 12.4% 12.2% 12.1% Net Income % 1.5% Net Income Margin 9.2% 8.9% 8.5% Sources: Aramex and NBK Capital nbkcapital. com 5

6 Financial Statements Balance Sheet (AED Thousands) Fiscal Year Ends December ASSETS Cash and Short-Term Investments 501, , , , , , ,788 Total Receivables, Net 349, , , , , , ,287 Prepaid Expenses 24,453 32,955 37,424 41,957 46,719 51,471 56,456 Other Current Assets, Total 62,542 64,744 94,808 89,508 99, , ,439 Total Current Assets 937,917 1,056,466 1,026,984 1,266,161 1,508,651 1,771,397 1,832,969 Property/Plant/Equipment, Total - Net 246, , , , , , ,268 Goodwill, Net 853, , , , , , ,199 Intangibles, Net 5,730 8,927 8,927 8,927 8,927 8,927 8,927 Other Long-Term Assets, Total 14,231 25,722 28,166 30,847 33,791 37,021 40,567 TOTAL ASSETS 2,058,222 2,286,458 2,417,886 2,672,498 2,935,349 3,224,026 3,316,930 LIABILITIES & EQUITY Historical Forecast Accounts Payable 118, , , , , , ,295 Short-Term Debt (Balancing Debt) 8,951 6, Current Port. of LT Debt/Capital Leases 7,482 6,715 8,394 10,492 13,115 16,394 20,493 Other Current Liabilities, Total 232, , , , , , ,827 Total Current Liabilities 367, , , , , , ,615 Long-Term Debt 6,463 6,503 7,804 8,584 9,013 9,464 9,937 Deferred Income Tax 1,037 1,295 1,360 1,428 1,499 1,574 1,653 Minority Interest 28,143 24,577 25,806 27,096 28,451 29,873 31,367 Other Liabilities, Total 59,618 66,958 70,975 75,234 79,748 84,533 89,605 Total Liabilities 462, , , , , , ,177 Total Equity 1,595,655 1,780,999 1,884,395 2,065,762 2,264,696 2,488,560 2,512,753 TOTAL LIABILITIES AND EQUITY 2,058,222 2,286,458 2,417,886 2,672,498 2,935,349 3,224,026 3,316,930 Income Statement (AED Thousands) Historical Forecast Fiscal Year Ends December Total Revenue 1,960,786 2,211,996 2,494,958 2,797,123 3,114,605 3,431,377 3,763,714 Cost of Revenue 852,745 1,021,830 1,177,234 1,331,837 1,499,782 1,661,416 1,836,738 Gross Profit 1,108,041 1,190,166 1,317,724 1,465,286 1,614,823 1,769,961 1,926,976 Selling/General/Admin. Expenses 443, , , , , , ,671 Depreciation/Amortization 45,726 48,703 54,869 58,137 61,410 64,045 67,270 Other Operating Expenses, Total 412, , , , , , ,814 Operating Income 206, , , , , , ,221 Interest Income (Exp), Net Non-Operating 12,374 15,117 9,228 10,335 14,358 19,120 21,046 Other, Net (250) 3, Net Income before Taxes 218, , , , , , ,267 Provision for Income Taxes 11,441 14,935 15,398 16,347 17,949 20,046 21,765 Net Income after Taxes 206, , , , , , ,501 Minority Interest (22,435) (25,485) (28,034) (30,837) (33,921) (37,313) (41,044) Net Income 184, , , , , , ,457 Cash Flow (AED Thousands) Fiscal Year Ends December Cash from Operating Activities 264, , , , , , ,417 Cash from Investing Activities (65,737) (160,484) (202,427) (58,850) (62,967) (66,379) (72,861) Cash from Financing Activities (44,315) (32,185) (141,156) (80,696) (88,945) (97,363) (324,085) Foreign Exchange Effects 3,614 (834) Net Change in Cash 158,035 52,877 (109,080) 129, , ,254 (15,529) Sources: Company financial statements and NBK Capital Historical Forecast nbkcapital. com 6

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9 KUWAIT DUBAI ISTANBUL CAIRO