The short thesis on Wisetech from Hong Kong based research house Bucephalus.
The short thesis on Wisetech from Hong Kong based research house Bucephalus.
Reported numbers were strong for the first half, with revenue up 31% and net profit up 22% (excluding reduction in contingent liabilities). Margins remained strong (despite a big increase in expenses), retention high, and core growth of Cargowise One platform also solid (up 24%).
Difficult to fault at face value really. Although the Short-seller's argue that most growth is really acquired, a lot of expense is hidden from the income statement due to high development capitalisation and acquisitions, and that the 'deal machine' that is Wisetech is enabled only by a high share price that allows them to tap the market for cheap cash.
Still, if you think that acquisitions will ultimately prove an efficient and quick way to gain entry into new markets and capture clients, and that the business will manage to eventually scale well under a fairer recognition of costs, and ultimately be the dominant software for the global logistics market, there's a not unreasonable bull case here -- especially if shares can maintain a healthy market premium to help underpin growth funding.
It's a tough one; i think both cases make some fair points.
Then you have the huge drop in the outlook, which has resulted from the Corona Virus impact to China (which accounts for 16% of global GDP and is of course a major logistics hub).
Wisetech have forecast full year revenue of $420-450m (up 21-29%) and EBITDA of $114-132 (up 5-22%). This compares to prior guidance of $440-460m for revenue and $145-153m for EBITDA. That's a drop in guidance for revenue and EBITDA of 3.3% and 17%, respectively.
Of course, when pandemic related issues abate, there'll likely be a big tick up in logistics activity, but exactly when and by how much is unknown. Nevertheless, it's not unreasonable to treat this imapct as a legitimately one-off, and doesn't itself impact the existing long term Bull or Bear cases.
I personally think there's an excellent business at the core, but am mindful of the risks associated with the existing growth strategy and some of the legitimate financial reporting concerns.
Results presentation can be seen here
After today's drop, shares are still on a forward P/S of ~17, or 61x forward EV/EBITDA (excluding contingent liabilities). Stll too rich for me.
19-Oct-2019: After the market closed yesterday afternoon (on Friday October 18), WiseTech released their response to the first of JCAP's short-seller documents about WTC. That announcement can be read here. It is titled: "WTC responds to misinformation in the market"
It details many of JCAP's accusations about WiseTech and responds to each of those. As expected, WTC refutes all of JCAP's claims. For some idea of how this may play out, RFF have been going through something similar. I don't expect it to play out like QIN or BLA - who were both targeted by similar short sellers and both went into administration for a 100% loss for shareholders. While growth rates may have been somewhat exaggerated, I am reasonably confident that WTC is NOT a house of cards ready to come tumbling down - like QIN or BLA did. WTC is a real business with real profits and real growth and certainly one of Australia's largest tech companies. I doubt they're worth $30/share (where they are now), but I thought they were expensive at $17 also (last year). However - they're also not worth $0. They're worth something. In the coming weeks they may get down closer to a sensible valuation. Of course, they might not also. The market might just shrug this off and keep backing WTC to keep growing at the rates that they have been so far, and price them accordingly (on future profits rather than current ones). We shall see.
Disclosure: Not holding WTC.
To continue on about the rationale behind the acquisition strategy that WiseTech employ...
Richard White has devoted much of his time in recent years to developing a reliable and highly repeatable system to integrate these acquisitions into WiseTech Global. He says that's he's an engineer and is focussed on systems, and repeatability - so systems that work consistently the same way every time. He believes that he's developed such a system to enable seamless integration of all of these acquisitions into WiseTech Global.
In reality, there are always some issues, including culture differences, the continued motivation of management when they become employees rather than employers/business owners, issues around valuation - including the value of intangible assets that are often written down in subsequent years in many cases, and in this case we can also add language barriers to that list. Richard White tells us that he's got all of that under control. Perhaps he has. However, I think it's certainly prudent to assume that there is still significant risks attached to this strategy.
I think the strategy looks sound. I think they really have to go about it this way to achieve their objectives. However, it would be a mistake to assume that this is without risk.
There are risks with all investments. That brings us to likelihood and risk mitigation. Regarding the integration risks and other risks associated with this extraordinary level of acquisition activity, it probably gets down to how good Richard White and his systems are. He won't be able to completely eliminate the risks, but he has probably significantly reduced them, and mitigated the possible effects of those that remain. Probably...
I don't own any WiseTech shares currently, having recently sold out because at these lofty levels the downside looks greater than the upside to me. However, I really, really like this company and do really admire what Richard White has been able to achieve with WiseTech. At more reasonable levels, like back closer to $10, I'd be back in. They will have another correction at some point because there is a rediculous amount of growth priced in up here. They are rising purely on momentum now. However, that correction could come tomorrow, or in another 6 or 12 months. I don't know. The biggest risk with WiseTech currently is jumping on them at around $17 (where they are today) just in time to catch that correction. That's the risk I'm most worried about.
Update: 19-Oct-2019: Didn't need to be worried about the downside so much it seems - when they were $17 at least - that was all written almost a year ago - in late November 2018 - and they more than doubled from there to over $38 in early September this year (2019). They are a little lower at $30 now and under attack from a short-seller "investment research" firm based in the USA, ("JCap"), so when they emerge from their trading halt on Monday we'll see where they land. However, it will be a damn sight higher than the $17 level I was worried about last year. I wasn't so much worried about their accounting and overstating of growth rates and profits as much as the nose-bleed valuation when compared to profits (stratospheric PE ratio) and the extrordinary level of aquisitive growth - and what can go wrong with companies that make SO many acquisitions (remember QBE a few years ago?). Anyway, JCap have said that this was the first of a series of reports on WTC, so we can expect this to drag on for a little while, like the attacks on RFF (Rural Funds) have. WTC's first statement of rebuttal can be read here.
Disclosure: I am neither long nor short WTC at this point in time. I never short. I don't hold WTC purely because I think their valuation looked stretched at $17, and looks even more stretched at $30. I have held them as a momentum trade in the past however (for a good time, not a long time).
08 January 2020
WiseTech Global acquisition of leading logistics solutions provider in Switzerland, SISA Studio Informatica SA
Global logistics solutions group, WiseTech Global, today announced the acquisition of SISA Studio Informatica SA (SISA), a leading customs and freight forwarding solutions provider in Switzerland.
Headquartered in Lugano, SISA is a Swiss market leader in providing customs and logistics solutions including customs clearance, freight forwarding and bonded warehouse management. SISA’s customers include DHL Logistics (Schweiz), Fiege Logistik (Schweiz), FedEx, Post CH, Agility Logistics, F. Hoffmann-La Roche, and many other exporters, freight forwarders, and logistics service providers.
WiseTech Global Founder and CEO, Richard White, said “For over 40 years, SISA has accumulated a powerful breadth and depth of expertise across the customs and logistics landscape in Switzerland that will enhance our global customs and localisation capability,and further strengthen our solutions for logistics providers throughout Europe.
“With Switzerland the ninth largest economy by GDP in Europe, the third largest trading partner with the EU for exports of goods and the fourth largest trading partner with the EU for imports of goods1, bringing SISA into the WiseTech group now, consolidates our considerable geographic foothold in customs clearance and border compliance. Combined with our relentless investment in innovation and expansion of our CargoWise platform, together we will continue to provide solutions to our customers that will enable greater control over international compliance and achieve lower-risk cross-border execution in the changing European and global trade landscape.
”For SISA, the net purchase price comprises~$15.5mupfront,with a further multi-year earn-out potential ofup to~$8.9m, related to business and product integration, customs development and customer conversion2. While of strategic value, this transaction is not material to the WiseTech Global group, with SISA providing 2018 annual revenue of ~$12.4m and EBITDA of ~$500k3. SISA is expected to be consolidated into WiseTech Global accounts fromFebruary 2020.
Remaining under the leadership of Managing Director,Roland Schumacher, SISA’s operations will be integratedwithin the WiseTech Global group and SISA will continue to deliver their customs and logistics solutions directly to their customers, along with CargoWise One over time.
This transaction follows WiseTech’s other recent logistics solutions acquisitions in Argentina, Australasia, Belgium, Brazil, Canada, France, Germany, Ireland, Italy, the Netherlands, North America, Norway, South Korea, Spain, Sweden, Taiwan, Turkey, the UK and Uruguay, and is in line with WiseTech Global’s clearly stated strategy of accelerating long-term organic growth through targeted, valuable geographic foothold and technology adjacency acquisitions.
Matthew Kidman talks to Shane Fitzgerald from Monash Investors and James Gerrish from Market Matters about WiseTech Global, Appen, Afterpay, Altium and Xero.
The only one of those five that they both have a "sell" on is WiseTech (WTC). Click on the link above to hear their reasons.
19 November 2019
AGM addresses, on track to deliver FY20 guidance
In FY19, our business continued to experience strong growth with revenues up 57% to $348.3million, and net profit after tax attributable to equity holders increasing to $54.1million. These results were fuelled by significant organic growth in revenues across our global business, plus the development of hundreds of product enhancements and features for our CargoWise One technology platform, and the acquisition of many strategic assets in new geographies and adjacent technologies.
Importantly, our revenues are high quality. For CargoWise One customers, our recurring revenue is 99% of total revenue, with 98% usage-based and our customer attrition rate remains well below 1% for the seventh year in succession.
During FY19, we continued our focus on innovation, investing over 32% of our revenue and over 47% of our people in product development. We further expanded our pipeline of commercialisable innovations and delivered over 830 product upgrades seamlessly across the CargoWise One platform to our customers across 150 countries. Our investment in product development and innovation over the last five years totalled $309m, and we are accelerating our development capability within our innovation teams across our 35+ development centres.
Investing deeply, and innovating continuously over the long term, makes our products easier to sell so revenues grow faster and make our sales and marketing efforts highly efficient, utilising just 14% of revenue and 12% of our people.
During FY19, and in the months since, the 15 valuable geographic and adjacent acquisitions we have announced across Europe, Asia, Australasia and the Americas will allow WiseTech to access market positions and key technologies that would otherwise take years to build. We then integrate the acquired industry and developer talent and customers over time to accelerate our long-term organic growth.
Our acquisitions in key adjacent technologies facilitate development of globally scalable innovation and fuel the convergence of technologies that add to our next generation of automations and machine learning. We also use these to grow and enhance our extensive global data and transaction sets. In addition, each new geography and adjacency we acquire adds a valuable point on our strategic map and accelerates the network effects. All of which makes CargoWise even more compelling to local and global logistics providers.
In FY19, we continued to leverage our acquired business relationships with key global customers and explored connections between the adjacent acquisitions, CargoWise and our geographic footholds. With our strategic execution and strong organic growth in FY19, the power of our CargoWise platform, annual attrition rate of less than 1% and continued investment in innovation and expansion across our global business, we are well positioned for the future.
Sustainability and environment
Global logistics is one of the world’s oldest and largest industries with annual revenues of $16trillion – yet that industry is resource intensive. As a pure technology company our own sustainability footprint is small. But our technology is designed to maximise efficiency, minimise energy and resource wastage, and reduce risks across the global supply chain. With CargoWise licensed in 150 countries, increased productivity from our technology can have widespread environmental benefits. Examples include:
Efficiency improvements available through the software we provide also allow automation and the removal of numerous manual tasks. This in turn reduces paper, electricity usage, human labour, and commercial costs.
Together, these deliver significant improvement in the world’s resources and beneficial impacts on land-side communities which can continue for future generations.
Shareholder returns, dividends and financial strength
In the full year to 30 June 2019, WiseTech provided shareholders with a Total Shareholder Return of 77.1%. The WiseTech share price rose 76.9% and outperformed the ASX 200 by 70.1% for the year.
We have declared a fully franked final dividend of 1.95 cents per share for FY19, which we paid in October. This is in addition to the 1.50 cent interim dividend paid to shareholders in April. We also offer a dividend reinvestment plan to enable eligible shareholders to re-invest their dividends to acquire additional WiseTech shares. Our ongoing dividend policy is to target a dividend payout ratio of up to 20% of our net profit after tax.
Our balance sheet remains healthy, supported by $112.5m of net cash flows from operating activities.
Just on the acquisition risk with WiseTech. This is not your traditional roll-up model played out on a global scale, although it can look like that sometimes. Richard White, the founder of the company, explains it well in this interview:
At about the 4 minute mark of that interview, Richard explains that they are making very targeted acquisitions, mostly in foreign language companies, to bring talented people and expertise into the WiseTech Global business, as well as the customer base that those companies bring with them. To develop those sort of businesses in those countries from scratch would require a lot more time and effort - and money too in most cases - than to acquire existing businesses that have already done all the hard yards. These businesses already have relationships with regulators, the government, and other businesses within those countries, which fast tracks the whole process.
WiseTech already have the best freight forwarding and tracking software suite in the world, CargoWise One, and these acquisitions are now just plugging the remaining gaps for the most part, to give them complete global coverage. Every country has its own laws and regulations, especially around freight coming into that country from elsewhere, and getting all of the compliance paperwork right and collecting and storing all of the necessary information, in the correct format, is vital for the CargoWise One platform so that they can deliver on their productivity promise. Increased productivity and lower costs (due to accurate streamlined systems) are core promises that require a lot of local knowledge from every jurisdiction in which they operate (which is - all of them). To build this global network mostly via acquisition is just the fastest and most efficient way of doing it.
WiseTech Global aren't building this network to compete against other freight forwarding companies. Those companies are WiseTech's clients. WiseTech sell their software to those companies. The idea is that CargoWise One will be so comprehensive and complete, in terms of geography, accuracy, relevancy and features, that every serious player in the industry will NEED to use it, or they will be at a competitive DISadvantage. They're already almost there, hence why so many players in the industry (including most of the big players) use CargoWise One already.
Like: Founder led and still own half of the company, niche market, high growth, high retention rate, SaaS, strategic acquisitions, continuous research and investment
Dislike: Current price