It's all in the speed... Ecommerce-generated deliveries keep powering Aramex's growth numbers. Image Credit: Gulf News

The logistics company Aramex has a Dh5.92 billion market cap and a 3.21 per cent dividend yield. Over the years, Aramex has consistently grown revenues - and rewarded shareholders as well.

From the lows of Dh0.62 in 2009, the period of the global financial crisis, its share price has rallied by more than 553 percent. Revenues rose by almost 149 per cent from Dh2.21 billion to Dh5.51 billion. On top of it, the management has consistently issued dividends, which has kept shareholders content.

In the latest quarter, revenues jumped 24 per cent to Dh1.42 billion, compared to Dh1.15 billion in Q1 2020. The rise in revenues was driven by the express deliveries business, including cross-border e-commerce and last-mile services. The B2B business, especially for healthcare and consumer goods clients, witnessed strong demand.

The domestic express business shipping volumes grew 29 per cent, while international express was up 14 per cent, and domestic e-commerce in core markets experienced volume growth of 36 per cent.

Battling headwinds

Nevertheless, the company does face some headwinds in the near term. Higher costs from supply-chain pressures marred an otherwise brilliant quarter, with net profit declining 32 per cent to Dh46 million compared to Dh67 million in Q1-2020. The fall was due to an increase in line-haul costs triggered by global capacity constraints.

Quite paradoxically, the requirement for container shipping grew through the pandemic as a surge in e-commerce led to heightened import demand for manufactured consumer goods. Global COVID-19 vaccine transportation and distribution generated further demand for cargo space.

Freight rates have roughly quadrupled y-o-y on the Asia-Europe route and doubled on the Asia-North America route in the last year. This includes container transport and inventory holding cost of an empty container. The tightness in the market is likely to continue, as seaborne trade will take time to adjust to a new normal on account of operational inefficiencies.

Costs add up

Orders for new containers are rising, but it will take some time for them to enter service. The elevated freight rates should sustain the pressure on margins. For the first quarter of 2021, EBITDA margins came in at 11.9 per cent, down from 16 per cent in Q1 2020. Nonetheless, the company has a strong balance-sheet as cash and cash equivalents are at Dh1.05 billion compared to long-term debt of Dh0.82 billion.

Aramex can withstand the turmoil, and it does have the capability to do so. Moreover, the company is a beneficiary of secular trends in growth in e-commerce since logistics is a vital cog of the industry.

Aramex is an excellent long-term play, but investors should be aware of near-term challenges.