EUR 21.76 For Business Accounts Only

Valuation full, downgrade to N from OW

Drop 12M TP by 7% to AED5.40/share. We cut our 2017-20 EPS estimates by an average of 14% to reflect the 9M17 revenue miss of 6% led by unfavourable FX changes at the domestic express and logistics segments (29% of top line); we anticipate net income to fall by 6% y-o-y in 4Q17. We expect a soft earnings rebound in 2018 as the impact is fully captured in 2017 and as we assume the USD:EGP will appreciate by c10%. Aramex trades 20% above the industry on a 2018e P/E at 18x, fairly reflecting its above average 2017-19e EPS CAGR of 14% vs. 8% for courier peers. We drop our DPO assumption to 55% from 60% in 2017 (guidance is ˃50%) on the basis that 2017e EPS should drop by 7.6% y-o-y.

Downturns priced-in. Aramex witnessed some downturns in 9M17 led by FX fluctuations in Egypt and India, impacting revenue by 4%. Application of the VAT in the GCC Jan 2018, could impact volume, says the CEO, but we still see c7% y-o-y revenue growth in 2018 driven by double-digit improvement at the int’l express segment (3x GDP growth weighted 60:40 global:GCC) with Asia Pacific in the lead. Management is optimistic about the rebound seen in freight forwarding; we estimate 2% growth p.a. starting 2018 at this segment (26% of 2016 revenue).

Moving towards variable business model. In an aim to drop costs, Aramex looks to hire employees based on volume through various outsourcing methods. This would allow Aramex to drop wage costs in seasonally slow months, such as July/August (3Q), compared to its usual strong 4Q. This effect, however, is unnoticeable to date as direct costs to sales rose 135bps y-o-y in 9M17. We drop our EBITDA estimates by 15% for 2017-20 and expect EBITDA margins to reach c14% in 2019 from 13.2% in 2017 as SG&A/sales drops.

Competition risks, potential for M&A looking more challenging. Amazon, the US giant, could potentially seek to set up its own infrastructure in MENA countries (60% of Aramex’s revenue) or acquire souq.com’s remaining stake (c50%) in the UAE. Aramex may be challenged to adapt to new delivery methods (i.e.: Uber delivery). Potential M&A in Asia/Africa (net cash/EBITDA is 0.4x as of 3Q17) could be blocked by regulators who aim to protect local post offices, according to management.