WiseTech Global Ltd (WTC)

Stock: WiseTech Global Ltd
Exchange: ASX Symbol: WTC
Date: October 22, 2019 Latest price: $26.30 AUD
Market Cap: $8.3 bn Fair Value Estimate: $10.36
Forward P/E: 100 Fair Value Payback: 12 Years
Financial Y/E: 30 June Rating: Sell
Sector: Technology Industry: Software – Infrastructure
Investment Theme: Long-term Growth Structural Trends: Software as a Service (SaaS)

Summary

We consider Wisetech (WTC) to be over-priced and rate the stock as a SELL.

Wisetech enjoys dominant market share in a niche market, and is an attractive business at the right price. At present the stock is trading at a sizable premium to estimated fair value and is under attack from short-sellers.

Short-selling

In past updates we identified the capitalization of software development costs as a weakness and valued the stock accordingly.

Several recent articles in the press have raised questions over Wisetech (WTC) value:

“When a company is priced at these nose-bleed levels there can be no room for error. These companies need to grow revenue or profit exponentially to justify the share price.

Any suggestions that profit or revenue have been pumped by accounting treatment would be a concern.” (The Age)

Wisetech responded with a rebuttal but a second trading halt was called as the short-seller JC Capital responded with further attacks.

Valuation

We revised our fair value estimate to $10.36 (AUD), based on 30% growth, as the company continues to benefit from acquisitions, and a reduced payback period of 12 years.

Technical Analysis

Wisetech is testing primary support at $26 after the attack from short-sellers. Trend Index dipped below zero, signaling a bear market. Momentum is falling but has yet to confirm the bear signal. Breach of support is likely and would signal a primary decline with a target of $14.

Twiggs Trend Index (13-week)

Company Profile

WiseTech is a leading global provider of logistics solutions through its SaaS platform. Founder Richard White is CEO and the largest shareholder.

WiseTech develop, sell and implement software solutions that enable logistics service providers to facilitate the movement and storage of goods and
information, domestically and internationally. They service around 8,000 logistics organisations across 130 countries.

WiseTech’s flagship technology, CargoWise One, is an integrated global software solution for logistics service providers that enables customers to execute highly complex logistics transactions and manage their operations on one database across multiple users, functions, offices, countries and languages. They operate their own data centres and deliver CargoWise One software principally through the cloud, as SaaS, which customers access as needed and pay for usage monthly.

Markets & Competitors

WiseTech has built a dominant position in its niche market. Customers range from large multi-national companies to small and mid-sized regional and domestic players, including 24 of the top 25 global freight forwarders and 34 of the top 50 global third party logistics providers (Armstrong & Associates: Top 50 Global Third Party Logistics Providers List ranked by 2017 logistics gross revenue/turnover).

Customer retention is high, at over 99% per year.

Weaknesses

Capitalisation of R&D expenditure assumes that expenditures can be scaled back in future years. This is not always achievable with software development.

Dependence on Richard White (founder, CEO, and majority shareholder) who may be difficult to replace if he loses the ability to effectively manage or attempts to execute a flawed strategy.

Financial Performance

Revenue Growth & Acquisitions

Revenue growth for the period FY15 to FY19 is close to 50% p.a., boosted by heavy spending on acquisitions in FY18 and FY19.

Revenue & Acquisitions

Organic revenue growth ranges between 20% and 30% p.a. according to a recent announcement.

Wisetech made 29 acquisitions at a total cost of $587 million in the two years FY18 – FY19, primarily logistics solutions businesses spanning new geographies (for local customs know-how) and new technology.

Margins

Net income (NPAT) grew at slightly above 50% since FY15, similar to revenue, exceeding revenue growth, indicating stable margins.

NPAT

Research & Development

The company invests heavily in research and development, spending around 32% of revenue.

Cash Flow

Wisetech spends heavily on acquisitions and free cash flow, after investing activities, is negative in recent years.

Free Cash Flow

Capital structure

Wisetech has minimal borrowings, with acquisitions funded by stock issues, and a strong cash balance of $260 million (FY19).

Financial Outlook

Wisetech forecasts that revenue growth will slow to between 26% and 32% in FY20, while EBITDA growth is slightly higher at 34% to 42%.

FY20 Outlook

EBITDA is not a fair reflection of performance as the company capitalizes significant software development costs. EBITDA adjusted for capitalized costs is a more modest $90m – $98m.

Disclosure

Staff of The Patient Investor may directly or indirectly own shares in the above company.