01-Aug-2017
Aramex - 2Q17: recurring earnings grow on EBIT margin expansion; slightly missed estimate with no surprises; reiterate Neutral
Rating: Neutral
Target Price: AED5.15
Closing Price: AED5.30
Earnings fall as 2Q16 included a positive one-off; growth is solid on a recurring basis
Recurring earnings grew 15% Y-o-Y to AED97mn (-7% vs. estimate), driven by low single-digit growth in revenue and a 1pp widening in the EBIT margin on lower SG&A-to-sales, other operating expenses and depreciation. On a reported basis, earnings fell 23% Y-o-Y as 2Q16 results were impacted positively by a one-off fair value adjustment (AED42mn) related to Aramex’s investment in AMC Logistics in Egypt. Revenue grew 4% Y-o-Y to AED1.15bn (-4% vs. estimate); growth was affected negatively by currency fluctuations, especially the EGP, which otherwise would have grown by 8%. The GCC performance in 2Q17 was relatively slow due to the holiday season and reduced number of working days, as well as the ongoing economic uncertainty; however, revenue increased at a healthy rate across Asia and the Asia-Pacific, the U.S, and Africa.
Trends sustain: diversification ex-GCC drives revenue growth
International express revenue continued to record double-digit growth (+18%) and was the main driver in terms of total revenue growth, while domestic express revenue softened 5% on slower GCC business (likely reflects weaker B2B activities in KSA) and FX impact. Cross-border e-commerce was the key driver for international express growth, especially in Asia-Pacific where demand continues to rise. A new 50,000sqm warehousing facility in Dubai has not yet started to contribute meaningfully to logistics revenue, which fell 5% Y-o-Y, and challenges to the freight forwarding segment sustained. GPM softened 1pp Y-o-Y with lower margins across main segments. Management previously attributed international express lower margin to the competitive pricing of some contracts in Asia.
Results show no surprises; reiterate full year estimates and Neutral rating
The 2Q17 results brought up no surprises and we expect 1H17 trends to largely sustain in 2H17. We broadly maintain our forecasts for the full year, which call for single-digit growth in revenue and double-digit growth in recurring earnings, and reiterate our Neutral rating. Catalysts for an upgrade include accretive returns from Aramex Global Solutions (its JV with Australia Post) that should benefit from rapid e-commerce growth in the Asia-Pacific region (management expects it to contribute to earnings gradually by end-17); and ii) expansion strategy and synergies post change in ownership (to include Alabar-led groups and Australia Post).
Wafaa Baddour, CFA
Target Price: AED5.15
Closing Price: AED5.30
Earnings fall as 2Q16 included a positive one-off; growth is solid on a recurring basis
Recurring earnings grew 15% Y-o-Y to AED97mn (-7% vs. estimate), driven by low single-digit growth in revenue and a 1pp widening in the EBIT margin on lower SG&A-to-sales, other operating expenses and depreciation. On a reported basis, earnings fell 23% Y-o-Y as 2Q16 results were impacted positively by a one-off fair value adjustment (AED42mn) related to Aramex’s investment in AMC Logistics in Egypt. Revenue grew 4% Y-o-Y to AED1.15bn (-4% vs. estimate); growth was affected negatively by currency fluctuations, especially the EGP, which otherwise would have grown by 8%. The GCC performance in 2Q17 was relatively slow due to the holiday season and reduced number of working days, as well as the ongoing economic uncertainty; however, revenue increased at a healthy rate across Asia and the Asia-Pacific, the U.S, and Africa.
Trends sustain: diversification ex-GCC drives revenue growth
International express revenue continued to record double-digit growth (+18%) and was the main driver in terms of total revenue growth, while domestic express revenue softened 5% on slower GCC business (likely reflects weaker B2B activities in KSA) and FX impact. Cross-border e-commerce was the key driver for international express growth, especially in Asia-Pacific where demand continues to rise. A new 50,000sqm warehousing facility in Dubai has not yet started to contribute meaningfully to logistics revenue, which fell 5% Y-o-Y, and challenges to the freight forwarding segment sustained. GPM softened 1pp Y-o-Y with lower margins across main segments. Management previously attributed international express lower margin to the competitive pricing of some contracts in Asia.
Results show no surprises; reiterate full year estimates and Neutral rating
The 2Q17 results brought up no surprises and we expect 1H17 trends to largely sustain in 2H17. We broadly maintain our forecasts for the full year, which call for single-digit growth in revenue and double-digit growth in recurring earnings, and reiterate our Neutral rating. Catalysts for an upgrade include accretive returns from Aramex Global Solutions (its JV with Australia Post) that should benefit from rapid e-commerce growth in the Asia-Pacific region (management expects it to contribute to earnings gradually by end-17); and ii) expansion strategy and synergies post change in ownership (to include Alabar-led groups and Australia Post).
Wafaa Baddour, CFA