I NVESTMENT R ESEARCH I NITIATION OF COVERAGE | January 22, 2008 U NITED A RAB E MIRATES
Hassan Awan
Tel: +971 (2) 619 2369 hawan@tni.ae
Last Price:
Price Target:
Sector:
B
LOOMBERG
: ARMX UH
AED 2.96
AED 3.93
Transport
Stock Rating
R
EUTERS
: ARMX.DU

The Report prepared by TNI (TNI means “The National Investor” wherever mentioned) does not constitute an offer or solicitation to buy or sell the securities or any related securities of the subject company. The report is meant for named recipients only and should not be reproduced or distributed without prior written consent from TNI.
The recommendations in this report are solely based on research and analysis performed by our investment research department using the information currently available which we believe to be reliable. We believe that the opinion expressed herein reflects all the available public information underlying the security of the subject company at the time of preparing this report and should not be considered as any assurance as to the future performance of the security from TNI and/or its directors or any of its employees. The price behavior of the security may materially differ from the opinion expressed herein, if some non public information at the time of preparing this research report, that has the potential to materially affect the price of the security, is made public subsequent to the release of this report.
TNI has not considered the particular investment objectives, financial situation or risk profile of the intended recipients while preparing this report. Before acting on the basis of this material, you should consider whether the decision conforms to your investment objectives after taking into account your financial situation and risk tolerance. Such decisions shall solely be at your own risk without any obligation or responsibility on the part of TNI, its directors or any of its employees.
TNI does and seeks to do business with the company covered in this research report. Investors should therefore be aware that TNI may have a conflict of interest as a result of such relationships.
TNI and/or its directors or any of its employees may, from time to time, own, buy, or sell securities of the company (including derivatives linked to such securities) and investors should be aware that such activities may be a source of conflict of interest.
02 | Aramex | TNI I
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E QUITY R ESEARCH
Hassan Awan
Tel: +971 (2) 619 2369 hawan@tni.ae
Share Data
No of shares (m)
Avg Daily vol (AEDm)
Avg Daily vol ($m)
Free Float
Mkt cap (AEDm)
Mkt cap ( US$m )
Source: Reuters
1,100
46.3
12.6
59.1%
3,256
886
I NITIATION OF COVERAGE | J
ANUARY
22, 2008 U NITED A RAB E MIRATES
Last Price:
Price Target:
Sector:
AED 2.96
AED 3.93
Transport
Stock Rating
B LOOMBERG : ARMX UH
R EUTERS : ARMX.DU
Aramex follows a non-asset based business model wherein it avoids owning fixed assets. The resultant capital structure is very conservative and debt-averse. As of
September, 2007 shareholders’ equity accounts for 76.25% of the balance sheet size. The logistics industry is crowded with asset-heavy companies which invest in their own transportation equipment. Aramex has significant flexibility as far as its suppliers (airlines) are concerned as it depends on their aircraft for transportation.
Organic growth coupled with a dedicated acquisitions team makes Aramex poised for growth. Aramex has differentiated itself successfully and is approaching the future with focused determination. The company intends to be the fifth largest logistics provider in the world by 2010. In 2006, the company spent $40m on acquisitions and going forward it has plans to undertake acquisitions in the US and untapped regions of Asia.
The Middle East is gaining ground in world logistics. It is one of the fastest growing markets in the world and given the strong presence of Aramex in the region, it should benefit from this growth. The air freight market in the Middle East has been growing at an average rate of 15% since 1995. Revenues and operating profit of Aramex on the other hand have been growing at a CAGR of 28% and
40% respectively in 2002-06. Our DCF-based target price is AED 3.93, an upside of 32.7% to the current price of AED 2.96.
Forecasts and Ratios
Yr to Dec Revenue
(AEDm)
2006
2007E
1,363.8
1,790.6
2008E 2,251.0
2009E 2,827.9
Source: TNI Investment Research
EBITDA
(AEDm)
133.0
181.7
246.2
309.1
Net Profit
(AEDm)
95.2
119.0
160.7
201.7
EPS
0.10
0.11
0.15
0.18
PE
31.1
27.4
20.3
16.1

Contents
Investment Case
Valuation
DCF valuation AED 3.93
We rate Aramex as Underpriced
A laggard in the stock market
Shareholding pattern
Catalysts for the share price
Risks to our investment case
Aramex: distinctive and successful
Services provided by Aramex
An exclusive business model
The Aramex focus
The Aramex acquisition strategy
A debt-averse approach
A success story
Controlled margins despite acquisitive strategy
SWOT analysis
Competitive analysis
Performance in 3Q/07
Growing revenues and profits
Seasonality squeezing margins
Logistics and freight driving growth
The freight and logistics industry
Industry structure
Industry statistics
The Middle East market
Industry drivers
Financials
Summary financial statements
Ratio analysis
Ratings Definitions
22
22
22
24
25
15
17
17
20
21
12
13
14
15
25
26
27
28
30
8
10
6
8
10
11
12
5
6
30
32
35
04 | Aramex | TNI I
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Investment Case
In an industry where the largest companies rely on their hold of aircraft and related fixed assets, Aramex stands out as exceptional. The management insists on following a non-asset based approach which entails practically no leverage for the company. This might be in stark contrast with giants of the logistics industry but Aramex is convinced it is the right way to differentiate itself.
The mission statement of the company is precise and leaves nothing for imagination. The management wants to make Aramex the fifth largest logistics company in the world. Their definition of competition is coverage and not sales or capitalization. With a steady stream of acquisitions,
Aramex is on its way to achieving this mission.
Organic growth is as important for Aramex as external growth. Over the last few years, the former has been going hand in hand with systematic acquisitions. With such acquisitions the company has penetrated geographical areas like Europe and Asia. The company has its eyes peeled for further expansion in Asia in particular, given the strong economic growth in countries like China.
Revenues of the company have grown at a CAGR of 28% between 2002 and 2006. The advantage of this non-asset based approach is that
Aramex is free to choose from a number of transporters when it needs to deliver its goods. Owning and running its own aircraft would deprive
Aramex of such flexibility and would result in significant maintenance costs.
Our Underpriced rating of Aramex is based on its successful yet differentiated business model and a growing industry. The Middle East is gaining ground in world logistics. It is one of the fastest growing markets in the world and Aramex is strategically placed to benefit from this boom.
The company has clear goals, a different business model, comparatively faster growth rates and a smart acquisition strategy. Our DCF-based target price is AED 3.93, an upside of 32.7% to the current price of AED
2.96.
January 22, 2008 | 05

Valuation
The WACC of Aramex is its cost of equity
ERP calculation is based on the MSCI Emerging Markets
Index and GCC benchmarks
The Weighted Average Cost of Capital of Aramex is limited to its cost of equity because of the near absence of debt. We have used the Capital
Asset Pricing Model to calculate the cost of equity of Aramex.
Table 1: Cost of Equity calculation summary
Risk-free rate
TNI Beta
TNI Equity risk premium
3.71%
0.45
11.39%
Cost of Equity 8.84%
Source: TNI Investment Research
We have used the yield on the 10-year US Treasury bond as a proxy for the risk free rate. This is because the UAE Dirham is pegged to the US dollar.
TNI Beta calculation
We have calculated the beta of Aramex based on its daily returns versus those of the DFMGI.
Equity risk premium calculation
Our calculation of ERP has been derived from the MSCI Emerging
Markets Index to which we add our calculated returns on the GCC benchmarks. The risk free rate is then subtracted from the resulting composite index.
We have chosen a terminal growth rate of 4.50%, which is a discount to the long-term growth rate of world trade. Movement of goods is the primary driver for the logistics business. Since 1980, world trade has been growing at a CAGR of 7.33%.
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Valuation
Chart 1: World trade 1980-2007
14,000
12,000
10,000
8,000
6,000
4,000
2,000
0
CAGR: 7.3%
19
80
19
81
19
82
19
83
19
84
19
85
19
86
19
87
19
88
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
Source: EIU
Table 2: DCF valuation
(AED m)
EBIT(1-t)
+Depreciation
-CapEx
+Working capital
=FCF x Discount factor
=Discounted FCF
Terminal value (TV)
Sum of discounted FCF
+Discounted TV
=Enterprise value
+Net cash (debt)
=Value of equity
÷Number of shares (m)
=Fair value (AED)
Current share price (AED)
Upside (downside)
Source: TNI Investment Research
2007E
5,055.1
512.6
3,602.9
4,115.5
202.5
4,318.0
1,100
3.93
135.1
37.4
-82.4
-61.5
28.7
1.00
31.5
2.96
32.7%
We have used a five-year DCF valuation for Aramex. Being a non-asset based company, Capital Expenditures are minor.
2008E
183.1
50.8
-103.5
-47.6
82.7
0.92
76.7
2009E
227.0
66.8
-130.1
-25.4
138.3
0.84
117.1
2010E
283.2
86.9
-163.8
-32.3
173.9
0.78
135.5
2011E
354.8
112.2
-206.7
-41.1
219.2
0.71
157.1
January 22, 2008 | 07

Valuation
Aramex is a fast growing company with an exclusive business model.
The risks taken by the company are not financial, but strategic. In an asset-heavy sector, it has resorted to a policy of a liquid and non-asset based balance sheet. The company’s goals are precise and in light of its past performance, achievable. Aramex is a founding member of the
Global Distribution Alliance, which brings together members of the logistics industry. With a differentiated strategy, Aramex has increased its presence around the world and registered healthy growth. We expect this growth to continue in the foreseeable future.
We have conducted a sensitivity analysis on the valuation as shown in the following table.
Table 3: Sensitivity analysis of valuation
7.8%
8.3%
8.8%
9.3%
9.8%
Source: TNI Investment Research
3.5%
4.06
3.64
3.31
3.03
2.80
Terminal growth rate
4.0%
4.50
3.99
3.58
3.25
2.98
4.5%
5.07
4.42
3.93
3.52
3.20
5.0%
5.85
4.99
4.35
3.86
3.47
5.5%
6.96
5.75
4.90
4.27
3.79
Aramex is strongly correlated with the market
Aramex is strongly correlated with the DFMGI Index (0.92) however it is much less volatile. In 2007, the DFMGI index advanced by an impressive
43.72% while Aramex’s stock price increased by just 27.63% during the same period.
08 | Aramex | TNI I
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Valuation
Chart 2: Aramex share price performance
6,500
6,000
5,500
5,000
4,500
4,000
3,500
1/3/2007 2/14/2007 3/28/2007 5/9/2007 6/20/2007 8/1/2007 9/12/2007 10/28/2007 12/11/2007
Source: Reuters
Aramex is significantly liquid
3.6
3.1
2.6
2.1
1.6
DFMGI ARMX
The transportation sector index in the UAE consists of three companies, which can hardly be compared on financial or operational grounds (Gulf
Navigation, Air Arabia and Aramex). Nonetheless, In terms of stock price performance, Aramex is at the bottom as shown in the following table.
Table 4:
Company 2007 stock price movement
Air Arabia +77.48%
Gulf Navigation +27.91%
Aramex +27.63%
Source: Reuters, TNI Investment Research
In addition it should be noted that both Gulf Navigation and Air Arabia listed on the DFM in 2007. Their performance therefore does not encompass the entire year of 2007.
Aramex is one of the liquid stocks in the DFM with average daily turnover of AED 46m since its first trading day. Consistent with the market trend,
Aramex’s share volume and traded value picked up pace in May 2007 and October-November 2007. May was an active period for the DFM as the top twenty companies staged a road show in London.
In the month of May 2007, Aramex advanced by 41% but after that brief rally, the stock remained range-bound until October. In October, strong correlation with the DFMGI and solid third quarter growth propelled the share price from AED 2.50 to AED 3.20 (+51.20%) in one month. As the market plummeted in the new year (2008), so did Aramex, losing 10% in four trading sessions to close at AED 2.96 on January 21.
January 22, 2008 | 09

Valuation
Aramex allows 49% foreign ownership and currently 59.10% of total outstanding shares are held by the public.
Chart 3: Aramex shareholders
12.40% 12.25%
16.25%
59.10%
Institutional investors, UAE 58 other investors
General public Foreign institutions
Source: Zawya
The important catalysts which can, in our opinion potentially affect the share price of Aramex in the near future include the following.
Results disclosure: Aramex is expected to announce its annual results for 2007 sometime towards end of January, 2008. Last year the company announced its results on the 28 th
of January. We are anticipating 25.0% growth in net profits for 2007.
Acquisitions: We do not have guidance from the management regarding specific target companies. However we are aware of the fact that Aramex is looking for potential targets in Asia and North America. Acquisition announcement by the company would potentially impact the share price.
Founder shares: The founder shares of Aramex are expected to expire this year (March, 2008). This could put downward pressure on the stock price. However it would also open more shares to foreign investors
(Aramex allows 49% foreign ownership). The overhang in trading days amounts to 89 in our estimates.
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Valuation
The main risks to our recommendation are operational and economic.
Deceleration of regional growth
Growing oil prices have contributed to the economic growth in the Middle
East. This growth serves as both a cost rise for companies like Aramex and a demand driver as economic prosperity is linked to trade growth. A deceleration of the regional economic growth rate could hamper
Aramex’s performance.
Management capacity
Aramex is constantly on the lookout for potential target companies. Too many acquisitions can potentially lead to a capacity issue because the company might not have the resources to manage a lot of subsidiaries.
Aramex has acquired at least eight companies since the beginning of
2005.
Integration risks
Given its acquisitive business model, Aramex is constantly exposed to the possibility of a dilutive target company. Aramex acquired three important companies in 2006. Out of these, TwoWay Vanguard has been somewhat dilutive. TwoWay was the largest acquisition by Aramex to date, costing the company about AED 115m. Gross margin dropped from
47.6% in 2005 to 45.5% in 2006.
Currency risk
Given the wide geographical presence of Aramex, currency risk is very important. The functional currency of the company is the UAE Dirham however revenues from outside the Middle East have been increasing steadily. In 2006, revenues from Europe accounted for 22% of total revenue compared to 5.4% in 2005. Given this composition, a 5% appreciation in the Dirham against the Euro can result in a 1.1% drop in total revenue. We believe that the impact on Aramex will be minimum as long as the appreciation is less than 10%.
January 22, 2008 | 11

Aramex provides total transportation solutions
Aramex: distinctive and successful
In 2005, Arab International Logistics acquired 100% stake in Aramex
International Limited following an AED 1bn IPO on the Dubai Financial
Market. Aramex is one of the leading logistics companies in the Middle
East. The company has aggressive plans for its immediate future and seeks to become the fifth largest logistics company in the world by 2010.
Aramex provides transportation solutions ranging from freight forwarding to express delivery and catalogue shopping. Over the years the company has diversified into a number of different avenues including newspaper distribution and documents storage. This diversification has been achieved primarily through acquisitions.
International express delivery
International express delivery is offered to both wholesale and retail clients with time-sensitive delivery requirements. Clients can track the progress of their shipments via the website of Aramex. The clients of this segment include trading companies, banks and pharmaceutical companies. Express delivery includes packages up to 50Kg in weight.
Freight Forwarding
Freight services offered by Aramex include air, sea and land transport.
Unlike express delivery, there is less stress on timely delivery in freight because the cargo normally requires specialized handling. The routes for ground transportation include all major cities of the GCC.
Logistics
Logistics services are offered in the Middle East and North Africa regions.
Logistics centres of the company are located in the GCC and the USA.
The services offered include warehousing, inventory management and supply chain management. Like express delivery, all orders related to the logistics segment can be tracked through the company’s website.
Domestic express delivery
Catering to pharmaceutical companies and banks among other customers, Aramex delivers small parcels in all cities where it operates.
The services include delivery of both documents and electronic products.
Moreover Aramex also provides other services like collection of payments and document return.
Document management
The documents management segment of the company was born with the acquisition of InfoFort. InfoFort is a documents management company based in Middle East and North Africa. Services in this segment include a range of activities from documents storage to digital archives.
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Aramex: distinctive and successful
Mailbox, shopping and magazine distribution
Other services provided by Aramex include a mailbox service in the UK and US. This service was started in 2000 and enables customers to have a personal mailing address in the US and UK to receive parcels and other mail. Shopping services include delivery of products to customers for certain websites and mail order catalogue companies. With the acquisition of the Jordan Distribution Agency in 2002, Aramex also started Magazine and Newspaper publication.
Aramex does not like fixed assets or debt
Capital structure is conservative and unique in industry
Chart 4: Capital structure in 2006
The management at Aramex is strongly debt-averse and believes in a non-asset based business model. This means that the company does not own or operate air craft and as much as possible, avoids investing directly into fixed assets. This is strikingly different from the major players in the global logistics market. The largest logistics providers in the world tend to have asset-heavy balance sheets.
The result of such a model is a very conservative capital structure.
Aramex has not taken any new debt recently except absorbing the debt of its target companies upon acquisition. In addition to the difference in asset structure, the capital structure of Aramex is therefore also significantly different from its international competitors.
Chart 5: Capital structure in September, 2007
20.8%
3.3%
21.4%
2.3%
75.9% 76.3%
Source: Aramex
Equity Debt Other liabilities Equity Debt Other liabilities
Source: Aramex
Growth has historically been fuelled by acquisitions in a number of segments. The management wants to ensure that new acquisitions are planned in such a way that potential negative impact is offset by organic growth of the parent company. The future plans of the company for geographical expansion are dependant on more acquisitions.
January 22, 2008 | 13

Aramex: distinctive and successful
The Aramex model is unique and successful
Aramex wants to be the fifth largest logistics company in terms of global coverage
Aramex is keen to be a leader in emerging markets while sustaining its footing in developed markets
Franchising compliments both the non-asset based approach and acquisitions
The management policy of no debt and a non-asset based approach to growth has resulted in success for Aramex in the form of high margins and growth rates. The strategy of the company is very clear when it comes to its future plans. This is visible from the mission statement of the company:
“To be recognized as the fifth global express and logistics service provider.”
The company does not intend to compete with the likes of FedEx,
Expeditors, UPS and TNT on the basis of revenues or profits. The standard of growth in the eyes of management is coverage and visibility.
The objective is to achieve this goal by the end of the current decade.
Inherently the company is very different from these global giants and this objective seems too optimistic. Aramex has resolute plans to achieve these objectives and in our opinion, it is on its way to accomplish them.
Expansion into new markets
Aramex currently runs 304 offices in 192 cities around the world. There are certain geographical areas in Asia which are still untapped. Moreover
Aramex has a twofold approach when entering a new geographical market: 1/compete with the existing logistics companies or 2/create an
“Aramex niche” in a highly competitive market where there are high barriers to entry.
The US presence of Aramex is the example of running a niche where the existing logistics network is gigantic. Aramex has a dedicated team which tracks opportunities for expansion into new markets. Acquisitions in markets like the US are meant to facilitate and sustain the company’s presence there.
On top of the acquisitive agenda of Aramex are emerging markets like
East Asia. The management is keen to acquire attractive companies in
China and has specialists in the region who are looking for potential targets.
Franchising
Franchising compliments the non-asset based approach of Aramex as it does not require investment in assets by the company. Moreover it also compliments the acquisitive strategy of Aramex. The reason for this is that Aramex has strict rules for quality assurance when entering an agreement. A franchisee must meet the operational standards of Aramex; when the same entity meets the acquisition standards, it could become a potential target.
With its global presence, Aramex has access to a diverse group of markets. Moreover if the large logistics providers are not interested in franchising, then Aramex is the only choice for a potential franchisee.
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Aramex: distinctive and successful
The logistics segment could grow significantly post-2009 when the new warehouse comes on line
Aramex is a founding member of the Global
Distribution Alliance
This is because Aramex is one of the few companies apart from the big four which have such an extensive network.
Leveraging existing infrastructure
Consistent with its non-asset based approach, Aramex is decisively focused on utilizing the existing infrastructure of the business. This is visible even in the head office of the company, which serves as both the management office and a retail outlet for express deliveries.
With strong growth in the logistics segment, the company is undertaking a huge expansion plan to augment its revenues from the sector. A new logistics warehouse is being planned in the Dubai Logistics City. This is expected to triple the company’s logistics capacity. The management has conservative estimates about the immediate demand for new capacity.
The new warehouse is expected to be operational sometime during the latter half of 2009. The contract to build the 798,000 ft
2
warehouse was awarded in November, 2007.
The Global Distribution Alliance
Aramex is a founding member of the GDA, which brings together about
40 logistics companies in the world. The GDA network represents 12,000 offices, 60,000 vehicles and $7.5bn in annual revenues. Aramex represents the GDA wherever it operates
Being a unique company in a competitive industry, Aramex has clearly defined requirements when it comes to acquiring other companies.
Aramex requires operational and financial consistency between the target companies and itself.
Table 5: Aramex acquisition strategy
Advantage
Financial
Management
Requirements
Stable cash flows and substantial operational history
Margins compatible with those of Aramex
Capacity to support leverage
Non-asset based business model
Management team should be willing to continue post-acquisition
Successful track record
Diversified client base
Company should not be part of an established network
Flexibility in terms of adopting Aramex’s accounting policies
Source: Aramex
Aramex has never been a highly leveraged company; this is a consequence of the management’s strategy of following a non-asset based model. In the first nine months of 2007, the net cash position of the
January 22, 2008 | 15

Aramex: distinctive and successful company remained strong and leverage ratios were very stable. Over the years though, the financial leverage index (Total Assets/Equity) has been declining. Most of the liabilities of the company are either related to subsidiaries or employee benefits.
Chart 6: Financial Leverage Index for Aramex
2.50
2.00
1.50
1.00
0.50
0.00
2002 2003 2004 2005 2006 1Q07 2Q07 3Q07
Source: Aramex, TNI Investment Research
The sharp drop in 2005 is a consequence of the IPO, following which the book value of equity rose to AED 1.05bn. The liability side accounts for just 22.4% of total assets at the end of the third quarter of 2007. As the company acquires other firms in similar business lines, capital structure can be expected to fluctuate marginally because Aramex would be taking on the debt of its target companies. Since there were no acquisitions between 2006 and 2007, the capital structure did not change significantly between the two years.
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Aramex: distinctive and successful
Aramex’s strategy to be different than the major logistics companies in the world has paid off in the form of comparatively higher growth rates.
Chart 7: Sales growth rates of major logistics companies
60.00%
50.00%
40.00%
30.00%
20.00%
10.00%
0.00%
Expeditors
Source: Company accounts
The major logistics companies are asset heavy
Margins depend on revenue mix and acquisitions
FedEx TNT UPS Aramex
2003 2004 2005 2006
Aramex has so far experienced faster growth rates than its global competitors. Unlike Aramex, these companies are generally asset-heavy.
In the case of FedEx for example, aircraft and related equipment account for 40% of total assets. Similarly, other companies like TNT also have aircraft and other bulky fixed assets.
Profit margins of Aramex have historically been quite stable though due to an expanding management team, operating margins have been squeezed at times. Margins also depend on the revenue mix because of the sharp difference in segmental profit margins. The revenue mix has been uniform over the last few years however it changed in 2006 following the acquisition of TwoWay Vanguard.
January 22, 2008 | 17

Aramex: distinctive and successful
Chart 8: Gross margin
50%
48%
46%
44%
42%
40%
46.42%
45.65%
48.46%
45.52%
47.61%
45.45%
46.92%
2001
Source: Aramex
Business segments have very different gross margins
2002 2003 2004 2005 2006 2007E
The gross margins across segments are substantially different because of the diverse nature of services offered by Aramex. Logistics is the most profitable segment as it primarily requires warehousing and storage. On the other hand, freight is the least profitable in terms margins because of the transportation involved. The gross profit margin is expected to rise in
2007 because of the growth in the international express segment.
Chart 9: Segmental gross margins in 2006
76.57%
80.00% 71.64%
60.00%
54.46%
57.19%
40.00%
20.00%
26.98%
0.00%
International express
Freight forw arding
Domestic express
Logistics Others
Source: Aramex
The share of different segments in total revenue has been stable over time. Revenue composition does however change whenever there is a significant acquisition. Currently, most of the revenues come from the international express and freight segments.
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Aramex: distinctive and successful
Chart 10: Revenue composition 2002-06
100%
80%
60%
40%
20%
0%
Source: Aramex
2002 2003 2004 2005 2006
International express Freight forw arding Domestic express Logistics Others
Going forward, Aramex plans AED 30-40m investment in the Logistics segment in 2009. The resulting increase in capacity will boost revenues from the segment if there is adequate demand. Increased revenue contribution from the Logistics segment could result in higher margins.
January 22, 2008 | 19

Aramex: distinctive and successful
Table 6: Aramex SWOT Analysis
Strengths Weaknesses
•
Non asset based : Aramex believes in following a non asset based approach. This is very different from the industry trend but has been remarkably successful.
•
Strong cash position : Aramex has a strong net cash position on its balance sheet. Given its plans to expand further, the liquid position should facilitate future acquisitions.
•
Diverse revenue base : Aramex earns revenues from six different services. Total revenues have been growing at an impressive CAGR of 28% since 2002.
•
Management capacity : Aramex has aggressive plans to expand its presence in the USA and Asia.
If there are too many acquisitions in the immediate future, management capacity can potentially be a constraint.
•
Global Distribution Alliance : Aramex is a founding member of the GDA, which is composed of over 40 logistics companies of the world.
Opportunities Threats
•
International expansion : Aramex is present in a number of geographical regions. There is still opportunity for growth in regions such as North
America, which represents less than 3% of the company’s sales.
•
Competition: The logistics sector is an active one in the Middle East and involves both local firms and multinationals like DHL and UPS. Secondly,
Empost’s planned IPO is also a clear sign of increasing competition.
Source: TNI Investment Research
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Aramex: distinctive and successful
The following analysis shows how Aramex has been successful at distinguishing itself in an industry dominated by asset-heavy companies.
Bargaining power of suppliers (low)
Aramex relies on a number of airlines to carry its goods to different destinations. There are no binding contracts between Aramex and such airlines and therefore Aramex has the flexibility of choosing from many regional carriers.
Barriers to entry (medium)
Aramex operates in a number of different logistics services, not all of which pose strong barriers to entry. Aramex has a singular and distinctive model in the industry which is based on virtually no investment in assets.
Generally, the logistics industry requires capital for investment in vehicle fleets and warehouses.
Bargaining power of customers (low)
With its 50,000 strong customer base, Aramex has no issue of customer concentration. To avoid such a situation, the company has employed a strategy wherein it targets to Small and Medium Enterprise segment.
Moreover the client base is distributed across all major industries.
Threat of substitutes (low)
Aramex operates in nearly all logistics business from freight to warehousing. Since transportation is not limited to land, sea or air alone, there is little threat of substitutes for Aramex.
January 22, 2008 | 21

Performance in 3Q/07
70%
60%
50%
40%
30%
20%
10%
0%
Revenue growth in the third quarter of 2007 was triggered by the logistics and freight forwarding segments. Compared to the first nine months of
2006, revenues from the logistics segment increased by 138.3%.
Similarly freight forwarding revenues increased by 40.3% over the same period last year.
The acquisition of TwoWay Vanguard has given momentum to the freight forwarding business since the second quarter of 2006. This is why sales in Europe have taken off sharply after the acquisition. The share of
European sales has since then been maintained between 21 and 29% of total revenue.
Chart 11: Geographical split of revenues
Source: Aramex
FY2006
Typically, Aramex experiences highest sales volume in the last quarter
1Q07 2Q07 3Q07
Middle East & North Africa Europe North America Asia
Historically the third quarter results in a slowdown in sales because of the post-summer vacation period. However this year revenues increased by
3.25% over the second quarter compared to a 0.1% decline in 3Q/06.
Historically, Aramex has experienced its highest volumes in the last quarter during the holiday season. Access to many geographical markets ensures that the effect of seasonality is minimal.
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Rising staff costs also squeezed margins in 3Q/07
Performance in 3Q/07
Chart 12: Quarterly revenues in 2006 and 2007
500,000
400,000
300,000
200,000
100,000
0
1Q 2Q 3Q
2006 2007
Source: Aramex
While revenues did increase by 3.25% over the previous quarter, margins were squeezed resulting in a decline in operating profit. In 2Q/07, Aramex registered operating income of AED40.41m; this figure declined to AED
32.28m in the third quarter. The reason for this decline was rising staff and other operating costs. The number of employees in Aramex has been increasing at a fast pace as shown in Chart 13. Rising costs coupled with little growth in revenues resulted in lower margins for the quarter.
Chart 13: Number of employees 2001-2007
7000
6000
5000
4000
3000
2000
1000
0
2001 2002 2003 2004 2005 2006 2007
Source: Aramex
Falling margins in the third quarter is a historical trend in Aramex’s accounts. The trend was very similar in 3Q/06 when EBIT margin fell from 8.28% in the second quarter to 7.08%. This is consistent with a drop in EBIT margin from 9.24% to 7.15% in the third quarter of 2007.
January 22, 2008 | 23

Performance in 3Q/07
All major segments registered strong growth in
9m/07
Following the acquisition of TwoWay Vanguard in 2006, Logistics and
Freight segments have registered substantial growth over their previous levels. In the first nine months of 2007, all major segments recorded strong sales growth however the highest growth was achieved by these two segments.
The two segments have very different profit margins; gross margin for the logistics segment averages around 70% compared to 30% for freight.
The net effect of revenue growth was a rise in gross profit margin to
47.1% in 9m/07 compared to 45.52% in the same period in 2006.
Chart 14: Segmental revenue growth rates
20.00%
10.00%
0.00%
-10.00%
International express
-20.00%
-30.00%
Source: Aramex
Freight forw arding
Domestic express
Logistics Others Total
1Q07
2Q07
3Q07
Both segments have been gaining ground as a percentage of sales.
Chart 15: Revenue split in 2007
45.19% 45.27%
47.60%
50.00%
40.00%
30.00%
20.00%
10.00%
0.00%
5.50% 5.94% 6.36%
1Q07 2Q07 3Q07
Freight forw arding Logistics
Source: Aramex
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The freight and logistics industry
The global air freight and logistics sector consists of freight and mail transportation by air. The sector is expected to have a value of $145.4 billion by 2011, an increase of 45.6% since 2006. The sector operating system is characterised by a network relationship among carriers, motor carriers, integrators, airports, freight forwarders, customers, suppliers, manufacturers and logistics service providers.
Asia-Pacific with 31.9% of the global value is the most lucrative region for The Middle East has a small share but is growing at a fast pace the air freight & logistics sector. The Middle East has a marginal share in the global air freight and logistics market. However it continues to stand out in terms of air freight growth. According to International Air Transport
Association (IATA), the growth in the Middle East is driven by new capacity addition by the region’s carriers, as well as the higher purchasing power of consumers from oil export earnings.
Chart 16: Market share of leading companies Chart 17: Regional split in 2006
7.00%
6.80%
6.30%
17.10%
26.70%
24.30%
79.90%
31.90%
DHL UPS FedEx Others
Source: Datamonitor
US Asia pacific Europe Other
Source: Datamonitor
The global air freight and logistics industry involves two types of players: integrated express carriers; and non-integrated freight carriers. However, depending upon the nature of the services offered, the global air freight and logistics market can be broadly categorised into two sections, the airline cargo market and the integrated express market.
The airline cargo market consists of more than 900 airlines. It is characterised by high entry barriers caused by hub dominance, the existence of computerized reservation systems, infrastructural constraints, regulation, and high capital investments. A brief explanation of the sub-segments is given below.
January 22, 2008 | 25

The freight and logistics industry
The air freight market grew at a CAGR of 5.6% in 2001-
06
Combi Carriers : Combi carriers are airlines that carry passengers as well as cargo on their planes. They use the belly hold of the aircraft to ship cargo. A majority of these carriers transport cargo in addition to their passenger business, with cargo carriage accounting for about 15 percent of the revenue model for a typical airline.
All Cargo Carriers : These service providers specialise in cargo carriage only and offer their services globally. Such dedicated cargo carriers have more flexibility in operations compared to combi carriers, as they have more airports to choose from as they do not need to operate from passenger-friendly airports.
Other Business Models : These include indirect air carriers who may not have their own aircrafts, but have close tie-ups with other cargo carriers.
Compared to approximately 900 airlines and thousands of forwarders operating worldwide, the integrated express business is the strongest consolidated market within the air freight industry.
Courier service providers : Courier service providers, the predecessors of integrators, originated in the late 1960s, shipping urgent, legal, financial or engineering documents as passenger baggage on scheduled airlines.
The classic integrators : The classic integrators specialise in the movement of small parcels with high frequency, short lead times and worldwide door-to-door transport.
Super integrators : Super integrators are the new breed of classic integrators who have extended their business model to offer forwarding services for ground, sea and air transport services worldwide.
Air freight accounts for around 35 percent of international merchandise trade by value, but less than 1 percent in terms of volume. The size of the global air freight and logistics market touched $99.9 billion in 2006, representing a growth of 2.8% (Y-o-Y). During 2001-06, the market has grown at a CAGR of 5.6%.
The sector clocked a volume of 164.8 billion freight ton kilometres (FTK) in 2006 and grew by 5.6 percent (Y-o-Y). During 2002-06, the air freight volume grew at a CAGR of 4.4 percent. In the first half of 2007, the air freight growth was 2.7 percent compared to the growth of 5.2 percent during the same period last year.
Regionally, the Middle East emerged as the fastest-growing air cargo region and recorded a growth of 16.1 percent in 2006. The key markets
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The freight and logistics industry
20%
15%
10%
5%
0%
-5% of Europe and Asia, were relatively subdued with 1.7 percent and 4.7 percent y-o-y growth, respectively in 2006. However North America was the most promising market. The freight growth increased from 0.4 percent in 2005 to 6 percent in 2006.
In HY06 and HY07, the Middle East has continued to grow in terms of freight traffic. The region may be small in terms of volume, but high growth rates are ensuring that it will catch up soon.
Chart 18: Freight traffic growth by region
Africa Asia Pacific Europe Latin America Middle East North America Total
Source: IATA, September 2007
Air freight has grown at an average rate of 15% since
1995
HY06 HY07
Asian cargo markets continue to lead the industry. Over the next twenty years, intra-Asia air cargo market is expected to grow at an average rate of 8.5 percent per year. The Asia–North America and Europe–Asia markets are expected to expand at average annual rates of 7.2 percent and 6.7 percent respectively.
The Middle East has witnessed a huge boom in the air freight industry in recent years. The air freight market has grown at an average rate of about 15 percent per year since 1995. A majority of the regional logistics companies have focused on domestic services with varying levels of partnerships with larger players to provide international services.
In 2003, Middle Eastern countries accounted for 5.7 percent of the world’s air cargo traffic in tonnage and 5.8 percent in tonne-kilometres.
These economies are dependent on other countries for most of their commodities and trade demand is directly related to oil prices.
Oil and petrochemical-related industries drive much of the region’s economy as oil accounts for 30 percent of the Persian Gulf countries’
GDP. Increases in the oil price bolster local government tax revenues and spending throughout the region. Consequently, the flow of air freight
January 22, 2008 | 27

Europe is the main trading partner of the Middle East
The logistics and freight business is pro-cyclical
Free trade agreements and other factors should contribute to growth in global trade
The freight and logistics industry into and out of the region is heavily dependent on the price of this single commodity.
Europe is the Middle East’s largest trading partner. The Middle East’s main exports to Europe are perishable goods, capital equipment and intermediate materials that originate primarily in Israel. Israel has the only significant manufacturing and agricultural base in the region.
Dubai is growing rapidly in the international air cargo business. Policies such as the Dubai Airport Free Trade Zone (which allows 100 percent foreign ownership of companies, tax holidays to companies for 30 years and zero duties on exported goods) have made Dubai an attractive destination for air freight operators.
Like demand for passenger air travel, demand for air freight shipment is a derived variable. Prime drivers of the air freight and logistics business include economic growth, globalisation, adoption of lean inventory strategies (just-in-time delivery of manufacturing components and declining air freight rates).
Economic growth
The global economic environment plays a crucial role in the development of the air freight industry. The air freight and logistics business is procyclical and changes continuously according to seasonal demand patterns. Cyclical changes can have either a short-term or a long-term character, where short-term cycles are related to seasons and long-term cycles are related to periods of economic growth and market saturation.
Globalisation
Global trade is growing at a fast pace and is expected to grow at an unprecedented rate in the near future. Free trade agreements and open aviation agreements are the main catalysts for globalisation. Since 1990, the volume of international trade has grown by 6.7 percent a year, almost double the growth rate in real GDP.
Asian markets
Increases in logistics spending are expected to continue throughout Asia, with the most aggressive growth coming from China. By 2007, China is expected to spend over $500 billion on logistics. Domestic Chinese traffic is expected to increase eight-fold over the next 20 years. China is seeing strong domestic demand, as it has the largest retail market in Asia. As the Chinese government continues to lift trade restrictions, there will be an increased amount of trade and foreign investment flowing into the country. The bilateral air services agreement between China and the US signed in June 2004 represented a significant step toward liberalising this important market.
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The freight and logistics industry
E-commerce is expected to grow at a CAGR of 14% over the next five years
Increasing competition requires lean inventory strategies
The IT sector is an important industry for the logistics business
Air freight rates have been declining over the last three decades
E-commerce
E-commerce is a major economic driver and remains a vital growth engine for global businesses. Its application reduces transaction costs and increases the velocity of transactions. Forrester Research predicts that US online retail sales will grow from $172 billion in 2005 to $329 billion by 2010. Consequently, E-commerce is expected to grow at a
CAGR of 14 percent over the next five years. This trend will benefit the air freight industry as well as companies who are engaged in point-topoint shipping in particular.
Lean Inventory Strategies
In today’s highly competitive world, companies are increasingly relying on just-in-time inventory to reduce their working capital requirements to help them compete more efficiently in the market place. As a result, companies are adopting lean-inventory strategies (including just-in-time and make-to-order) as an important competitive advantage. They plan to use air freight to reduce the lead time involved in inventory management, as well as to shorten delivery times to end-customer. These firms must also increase emergency use of air freight because they have less safety stock to avoid production shutdowns or retail stock-outs.
Industry-specific trends
Air freight demand is also sensitive to industry-specific trends among the high-value, time-critical goods that are transported by air. The export of time sensitive, high-value and high-tech goods has grown substantially, largely contributing to the growth of air freight. In particular, the IT sector provides an important source of demand for air freight operators in all regions, and especially in Asia, Europe and North America. In fact, hightech goods are estimated to account for 40 percent of air freight exports from Asia.
Declining air freight rates
Air freight rates have declined steadily over the last three decades, mainly because of an increase in air freight capacity, an increase in volume of business, greater competition and specialisation, incorporation of latest technologies, etc. As air freight rates have fallen, there has been an increase in the shipment of heavier goods of lower value by air freight.
January 22, 2008 | 29

Financials
Table 7: Summary income statements
AEDm
Revenues
Cost of sales
Gross Profit
EBITDA
Depreciation & Amortisation
EBIT
Net Income
Source: TNI Investment Research
Table 8: Summary balance sheets
AEDm
Cash
Receivables, net
Total Current Assets
PP&E
Goodwill (net)
Total fixed assets
Total Assets
Payables
Total current liabilities
Long-term debt
Total long-term liabilities
Share capital
Retained earnings
Statutory reserves
Total equity
Minority interests
Total equity and liabilities
Source: TNI Investment Research
FY2006
1,363.8
744.0
619.8
133.0
24.8
108.2
95.2
2006
222.6
261.7
562.5
128.1
803.7
949.9
1,512.4
117.5
290.4
13.4
54.5
1,000.0
43.6
2.0
1,148.2
19.3
1,512.4
FY2007E
1,790.6
953.7
836.9
181.7
37.4
144.2
119.0
2007E
241.6
343.4
680.3
173.1
809.4
1,003.4
1,683.7
112.7
320.6
7.6
56.2
1,100.0
150.8
13.9
1,267.4
39.5
1,683.7
FY2008E
2,251.0
1,194.9
1,056.2
246.2
50.2
195.4
160.6
2008E
334.6
431.7
861.5
226.4
809.4
1,056.1
1,917.6
163.7
361.3
5.8
62.6
1,100.0
295.3
29.9
1,428.0
65.7
1,917.6
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FY2009E
2,827.9
1,501.1
1,326.9
309.1
66.2
242.3
201.7
2009E
513.8
542.3
1,151.3
290.4
809.4
1,119.4
2,270.7
205.6
446.5
29.0
95.9
1,100.0
476.9
50.1
1,629.7
98.6
2,270.7

Financials
Table 9: Summary cash flow statements
Cash Flow (AED Million)
Net Income before minority interest
Depreciation & Amortisation
Working Capital change
Operating Cash Flow
CapEx
Investing Cash Flow
Increase in capital
Change in debt
Financing Cash Flow
Net Cash Flow
Source: TNI Investment Research
FY2006
113.4
24.0
-62.4
83.1
-55.3
-212.9
100.0
1.0
-11.9
-146.2
FY2007E
148.6
37.4
-61.5
126.9
-82.4
-82.1
0
-7.0
-10.9
19.1
FY2008E
199.5
50.2
-47.6
206.9
-103.5
-94.7
0
-1.9
-9.9
92.9
FY2009E
250.4
66.2
-25.4
293.8
-130.1
-117.8
0
23.2
-8.9
179.2
January 22, 2008 | 31

Financials
Table 10: Ratio analysis
Year to 31 Dec
Growth
Revenues
Gross profit
EBITDA
EBIT
Net profit
Margins
Gross margin
EBITDA margin
EBIT margin
Net margin
Liquidity & leverage
EBITDA/finance costs
Debt/equity
Current ratio
Valuation
P/E
EV/Revenue
EV/EBITDA
Returns
ROE
ROA
ROIC
Source: TNI Investment Research
2006
40.20
4.28%
1.94
31.08
2.25
23.11
9.06%
7.69%
8.98%
59.72%
52.47%
39.71%
25.12%
27.97%
45.45%
9.75%
7.93%
6.98%
2007E
48.28
2.88%
2.12
27.35
1.72
16.93
10.37%
7.87%
10.17%
31.30%
35.02%
36.56%
33.31%
25.00%
46.74%
10.15%
8.05%
6.65%
2008E
51.73
2.42%
2.38
20.27
1.37
12.49
12.68%
9.54%
12.53%
25.71%
26.20%
35.52%
35.48%
34.96%
46.92%
10.94%
8.68%
7.14%
2010E
33.37
2.78%
2.66
13.11
0.86
7.90
15.24%
10.94%
14.91%
25.93%
25.93%
25.88%
24.72%
23.15%
46.92%
10.93%
8.49%
6.97%
2009E
74.38
3.55%
2.58
16.14
1.09
9.95
14.13%
10.52%
14.00%
25.63%
25.63%
25.56%
24.02%
25.56%
46.92%
10.93%
8.57%
7.13%
2011E
49.78
2.11%
2.74
10.27
0.68
6.26
16.89%
11.86%
16.62%
26.20%
26.20%
26.16%
25.31%
27.68%
46.92%
10.92%
8.43%
7.06%
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Disclosure
A stock is rated Underpriced when TNI Investment Research believes its fair value lies at 15% above the current market price and the stock is likely to reach such fair value within the next 12-18 months.
A stock is rated Fairly Priced when TNI Investment Research believes its fair value lies between -15% and +15% of the current market price and the stock is likely to stay within this range during the next 12-18 months.
A stock is rated Overpriced when TNI Investment Research believes its fair value lies at least 15% below the current market price and the stock is likely to reach such fair value within the next 12-18 months.
Special disclosure : The National Investor holds a long position in
Aramex common equity.
All stock market data refer to the closing prices of January 21, 2008
January 22, 2008 | 35

The National Investor
TNI Tower, Zayed the 1 st
Street, Khalidiya
P.O. Box 47435 – Abu Dhabi, UAE
T: +971 2 619 2300
F: +971 2 619 2400 www.tni.ae