Stock: Wisetech Global Ltd
Latest Price: $15.47
Date: 9 August 2018
Financial Year: 30 June 2018
Results Due: 22 August 2018
WTC was added to the ASX 200 in December 2017 and shows strong growth in revenue and earnings as well as price performance since 2016.
We have not rated WTC as a buy signal because:
Our valuation is substantially below the current price. Assuming long-term revenue growth of 25%, while operating expenses grow at a slower rate of 23% due to economies of scale, delivers a value of $10.00 per share.
Results for the 6 months to 31 December 2017 (1H18) show declining Net Income and Free Cash Flow as a percentage of Revenue. Declining margins are the opposite of what we expect to see with economies of scale.
Free Cash Flow is also consistently lower than Net Income because a percentage of research and development costs is capitalized. While one can expect to benefit from current R&D in future years, most companies need to expend a constant percentage of Revenue on R&D in order to maintain their competitive position, especially in Software Development .
WTC looks like a great business, with strong customer retention rates, but is over-priced at present.
We will review WTC performance after FY18 results are announced on 22 August 2018.