Consensus community valuation
Ok WTC down heavily this morning on all that bad media. Is this over sold? I'd be interested in all Straw peoples thoughts here. The bull and bear case.
22 August 2024
Update my valuation range to $103 ($92 - $123) based on full model update, anchored of 2024 result and FY25 guidance.
In this case I have dropped more highly leveraged scenarios on the basis that RW maintains a conservative balance sheet, as $WTC continues to invest heavily (organically and inorganically) as it seeks to build the operating system for global logistics.
4 March 2024
Changing my valuation range to $80.00 ($62.00 - $96.00)
I'll try and keep a very long story short here: I know its only two weeks since I updated my $WTC valuation, But after watching the CommSec interview with Rickard White, I realised that with the major exapnsion into landside logistics, as well as AI exploitation, $WTC is significantly stepping up its rate of investment in the platform - both in absolute terms and as a % revenue. (see figure below) with capitalisaed development actually increasing 30% ove the PCP, I actually missed this last week, and was only prompted by the interview to go back and look at my model.
Graph from 1H FY24 Results
However, ORGANIC revenue for the half grew only 15% and organic revenue for Cargowise grew only 19%, and the delay of the new release of Cargowise means that we might reasonably expect this to flow through to H2.
I missed the full implications of this in my re-run of my valuation model last week, and was probably lulled into a false sense of security by seeing all the broker vals. moving significantly upwards (Confirmation Bias?).
So, I took a harder look at my revenue growth and margin evolution scenarios, generating the following distribution of valuations.
In the valuation range quoted above,I've ignored the levered valulation in the higest growth scenario, because in this case the reinvestment rate is higher and management is more likely to run a more conservative balance sheet.
My Mean (p10% - p90%) ranges as shown is $80.00 ($62.00-$96.00)
Minor tweaks to other parameters, but model largely as below (WACC 9%; growth in CV is 3.5% from 2043)
21-Feb-2024
Updated DCF model following 1H FY24, with major revisions to my valuation posted 11 months ago $71.00 ($49 - $98)
Valuation scenarios combining two sets of scenarios:
a. Unlevered: ($70.30 to $99.50), with one higher scenario of $130, which is rejected as starting revenue growth of 22% is considered too high for now, given the lower report organic revenue growth today, albeit it is noted that Cargowise organic is still growing at 19%.
b. Levered at 1.0x EBIDTA (phased in to 2029): ($77.55 to $111.02) rejecting high value of $147, as above)
Revenue Growth: Range of scenarios for annual revenue growth of 20% and 17% in 2024 tapering down to 16% - 14.5% (2032) and 11% (2042)
Margin Evolution ($84.64 unlevered scenario) - see graph below
Other Model Updates
- Continuing Value growth rate 3.5% (unchanged)
- WACC = 9% (updated from review of sources. Note last valuation used 10%, so reduction in WACC in line with market is offset by reduced revenue growth scenarios). You really can get whatever you want!
Observations
- With $WTC having spent c. $800m in acquisitions since the last model update, the revenue profile is uplifted and flattened.
- Margins are eroded in the next next two years, but recover over time in line with guidance indicated today for FY25.
- Will recalibrate based on the FY24 result - should only require minor adjustments, given the guidance provided.
- Premium over analyst models appears mainly due to longer term model horizon, which is justifiable given the analysis performed in last year's $WTC deep dive, assuming $WTC succeeds in building the "operating system for global logistics).
Important Disclaimer:
Prepared for my personal use and information only. Not to be used as a basis for investment decisions. The underlying models are not validated to be free from error.
In this straw, I summarise the market response, analyst response, and my own valuation update, following the surprisingly good result/outlook yesterday for $WTC.
Suffice to say, its a pattern we've seen before.
Market Reponse
The market opened positively, yesterday up 20% with the day's volumes of 1.8m about 4x daily norms. Today has added another 9%+ (at time of writing) on another 1.7m shares, taking the cumulative uplift to around 29%. Just to be clear, that's about $9bn market cap added.
Analysts
Overnight, several analysts updated their valuations and TPs. (Remember there TP's are 12m targets)
Here's a snapshot of the individuals I've been able to track:
The more complete set on marketscreener.com has moved as follows:
Prior to result: Average $92.82 ($55-$115; n= 18)
Post result: Average $107.32 ($55-$129; n=18)
An average change of +16%, albeit not all have updated.
My Valuation
I have previously reported the details of my detailed, long-run DCF model, built a couple of years ago.
Today was the first day I updated it following the Blume and Envase acquisitions early last year, which always muddy the waters, and I find that I need a clear 12 months for things to stablise, which they appear to.
Based on my range of scenarios for revenue and margin evolution, I get the following:
P(exp.) = $103; Range ($92 - $123)
My Divestment Decision
Earlier this year I sold my full $WTC holding at c.$96, because at that time the SP had flown up towards the top of my valuation range. On 5th August, I bought the position back at a cost base of $87.37, ... courtesy I think of the unwinding of the Japanese carry trade.
Although $WTC is a quality business, its share price is fairly volatile, partly because the market continually misjudges the temporary impact of %GM compression following acquisitions (which are about acquiring capability and market footprint, to then fold into Cargowise). This time a further misreading was due to $WTC taking time to develop the next set of product enhancements, resulting in high R&D and capex, with organic revenue slower to respond.
But whenever the market gets behind the eight-ball on what's really going on, and the result surprises, there is an over-reaction. This most recent "over-reaction" has even caught me by surprise. Having realised a gain of almost 40% in less than three weeks, I have today sold down 50% of my RL position.
I know it can be dumb to sell your winners. Real dumb. But over the last 8 years I have consistently sold down $WTC when it hits the top of my valuation range and bought back when the SP moves to the low end of the band.
One measure I track is the EV/EBITDA(forward) mulitple. Historically, this moves around quite a bit within the band of 38 to 52. Today at my exit price, it hit around 58. I'm confident history will prove that's not sustainable.
Whether its P/E or EV/EBITDA or any other valuation multiple, $WTC moves around quite a lot. So even though it is probably my favourite stock, and the business on the ASX I understand well (second only to $PNV), I do tend to move in and out of it every 1 to 2 years.
I didn't sell my entire position because sometimes the market gets completely irrational about $WTC, and it is not uncommon for it to go even higher over the coming weeks. Worst case, scenario, I'll hold what is still a 5% position in my portfolio for the long term.
Happy Days.
Disc: Held in RL (5%)
This Result looks ok at a glance:
21 August 2024 WiseTech delivers strong financial performance and outlook 33% CargoWise revenue growth, 28% total revenue growth 48% EBITDA margin, ahead of expectations WiseTech Global Limited (WiseTech or the Company) today announced its financial results for the twelve months ended 30 June 2024 (FY24). FY24 highlights
• Total revenue of $1,041.7 million, up 28% (up 15% organically1 ) on FY23
• CargoWise revenue of $880.3 million, up 33% (up 19% organically) on FY23, driven by full and part year effect of FY23/FY24 M&A and customer growth including new Large Global Freight Forwarder (LGFF) rollouts
• EBITDA of $495.6 million, up 28% on FY23; 48% EBITDA margin ahead of expectations and 4QFY24 EBITDA margin run rate at 50%
• Underlying NPAT2 of $283.5 million, up 15% on FY23; with statutory NPAT of $262.8 million, up 24%
• Strong free cash flow of $333.0 million, up 14% on FY23 • Final dividend of 9.2cps, up 10% on FY23; representing payout ratio of 20% of Underlying NPAT
• CargoWise customer penetration momentum continues with LGFF wins – Sinotrans (Top 25), APL Logistics, Yamato Transport, TIBA Tech and Grupo TLA Logistics. Nippon Express (Top 25) was secured post year-end
• Three breakthrough product releases announced for FY25 - CargoWise Next, Container Transport Optimization and ComplianceWise, with planned releases commencing 1H25
Final ordinary dividend (cps) 9.2cps up 10%
Transaction small % of their holdings - pay Tax?.. Why? No News.
Richard White Disposed: 208,239 Units or $18,697,690 Has balance of $10.831Billion
Name of Director Maree Isaacs Disposed: 18,519 Units or $1,662,821 ...Balance of $963.197Million
I’ll kick off by correcting the introductory remark in my straw this morning. Although revenue was a modest beat to consensus at (+3%), EBITDA and EPS were strong beats, with EBITDA +14% better than consensus. Hence the strong SP response, ending up over 11% on the day at the close.
As ever, it was a joy to hear Richard White talking about the business. So, rather than go through more detailed analysis of the results, I’ll focus on three big themes.
1. The Acquisitions and how they play into the strategy
2. Customer Value - proof?
3. Machine Learning/AI
1. The Acquisitions and how they play into the strategy
In one year, $WTC has taken a decisive set of steps in landside logistics, focused on North America.
The significant Blume and Envase acquisitions in early 2023 extend Cargowise capabilities from the port into import/export container haulage and rail. Blume is a leader in North America in internodal rail and Envase covers all aspects of container movements including trucking companies, port, depots and warehouses. These acquisitions further penetrate the supply chain, stepping beyond the original focus of the freight-forwarder and customs clearing, providing more of the solution onwards to end customers.
Later in the year, the smaller acquisition of Matchbox, complemented these capabilities. Matchbox allows operators working on the platform to swap container assets, thus significantly reducing the haulage from destination back to the base depot, yielding potentially significant cost savings to customers.
The next piece is the November acquisition of Sistemas Casa, the Mexican customs and international freight software solutions provider.
Richard briefly pointed out the growing importance of Mexico as a major trade partner to the US. What he didn’t dwell on, is that with increase risk perception around China, a lot of manufacturing investment is now heading into Mexico. So the time is right for $WTC to be building out its capabilities in landside logistics, to position itself for the growth in tradeflows within North America.
With this step change in capability, it is hardly surprising that $WTC is ramping up its R&D spending – now at 35% of revenue. Product development is 62% of $WTC’s headcount! This, added to the margin compression resulting from including the lower margin acquired businesses. I am curious to understand whether the deep integration of Blume and Envase is underway, given that the initial plan was to run them alongside Cargowise for a period until the understood better how to integrate. (I didn’t get the chance to ask this today, as I was in listen-only mode. One for next time)
There was a clue that serious integration is happening, because of the discussion about delays to the next release of Cargowise into FY25. This would make sense if there was serious effort underway to incorporate deeper landside capabilities in the next release. It also explains the lower revenue growth reported for Envase and Blume, as staff will have been focused on integration into cargowise, and not selling the legacy platform (Hey, Bucephulus, feel like round 2?).
Without giving guidance, RW indicated that the next release will drive strong revenue growth, as it will make several new revenue streams available. New features, new automations, and other customer efficiencies. These major releases will take place towards the end of the FY and feature in FY25. So, a key marker will be to understand how revenue growth evolves from FY24 into FY25 and into FY26.
2. Customer Value
The following slide attracted a lot of discussion on the call. It is a benchmarking slide prepared by Armstrong and Associates. It shows that of the Top 25 Global Freightforwarders that have Cargowise “In Production”, container volumes grew 82% between FY11-FY23. Whereas for the remainder of the Top25, growth was only 12%. (Note: $WTC now has 13 of the Top 25 global freightforwarders as customers, and six were or transitioned into production during the benchmark period).
Richard held this up as $WTC’s key calling card, predicting that with them now having 13 of the top 25 freightforwarders as customers, they may have reached the point where Cargowise has become the defacto industry standard.
Now, at this point I remind myself that correlation is different from causation. Indeed, industry consolidation will be one driver of growth of leading enterprises. However, Richard is clearly arguing that part of the difference is the value that Cargowise delivers its customers in terms of efficiency and differentiated ability for them to serve their end customers. However, what I think is irrelevant, and there is no doubt that this slide will be used by the sales and marketing team over the coming years!
3. Machine Learning and AI
Richard always gets asked about what $WTC is doing in big data, ML (machine learning) and AI. To date, he has resisted engaging in hype, other than to say they have always applying machine learning and AI, because ultimately Cargowise handles many tens of billions of transactions over time, giving the firm unique insights into the movement of materials account the world. Indeed, the business and its solutions cover jurisdictions and modes accounting for 55% of global trade with products in development extending this to over 70%.
Today for the first time, he made more of a feature about this talking to the slide below.
He linked this to the earlier material on product development, making it clear that they are aggressively applying these capabilities to their products, whether to the data itself, to coding, to training staff and customers, or to recruiting talent.
As an example, they’ve used generative AI to produce the results video in French, German, Spanish and Mandarin.
https://www.wisetechglobal.com/news/1h24-results-briefing-presentation-ai-generated-avatars/
Overall Takeaways
$WTC have been a little crafty. They took the hit six months ago to re-set margin guidance because of the impact of the acquisitions, and today they solidly beat that guidance.
In fact, today, by leaving the guidance unchanged, it is likely the FY guidance will also be beaten – almost certainly at the EBITDA level (which CFO Andrew Cartledge as much as admitted).
Digesting larger acquisitions than usual, with the step up in revenue, organic revenue growth is softer than we’ve seen recently, despite many global freight forwarders underway with their global rollouts. Of course, the last few years have been challenging in the global supply chains, and so I wonder whether that has played into the rate of deployment? There was no discussion on this, and only time will tell.
Clearly, $WTC are investing heavily in building the platform to be capable of delivering more functionality, capability and efficiency to customers. Over $1bn has been spent in the last 5 years in R&D alone, delivering 576 new cargowise product suite enhancements in 1H24 alone, taking the total in the last 5 years to over 5,500.
So with the next big upgrade and release of Cargowise put back to FY25, we’ll need to wait 12-18 months to see whether all this investment drives an uptick in organic revenue growth. (This was the case after the M&A spree of 2016-2019).
I’ve updated my valuation for $WTC. As with any company on such a high multiple, the range of uncertainty is high. My thesis is predicated on continued strong revenue growth far out into the future, with progressive margin improvement at all lines of the P&L progressively over time.
I’ve settled on a central valuation of $86, generated from scenarios ranging from $70 all the way up to $111. This time, I’ve discarded some of the valuations that rely on sustained higher growth rates for longer, until we see what FY25 and FY26 can deliver.
With today’s close at $88.75, the market is already ahead of me by a whisker, but given the potential upside, I’m very happy to hold $WTC and glad I topped up on the SP weakness that followed the results 6 months ago.
$WTC is now my second largest RL position, second only to $ALU (sniff).
No new disclosures that I could see at today's $WTC AGM.
A small sell-off today (low volumes) continues the 5-day trend, potentially as short term holders decided to hop-off in the absence of any upgrade and short-term catalysts beyond macro.
At a September conference RW indicated that EBITDA margins, guided this year to be 44%-45% (down 2%-3% on FY23), will gradually return to >50% by FY26.
This is because FY24 will bear the full year impact of the significant Blume and Envase acquisitions which are lower margin businesses. The $WTC track record has been to take 2-3 years to drive out the efficiences across the entire group as acquisitions are digested and integrated fully.
This margin expansion will turbocharge EPS growth, indicated by the EBITDA growth rate guidance range of 18% - 27%, noting the strong underlying Cargowise engine is forecast to grow revenue at 34% - 43%.
In a recent research note, Goldman Sachs noted that $WTC is unique as a global firm that is seeking to build a complete operating systems for global logistics. (Although refer to my earlier deep dives into $WTC which shows just how large and fragmented the global logistics eco-system is,)
$WTC currently trading at $64.00, which is well below my current Strawman valuation of $71.00, which is a little stale now and when updated in February '24 will likely be more like $80.00.
FWIW consensis is around $76 (range $52 to $95, n=15)
Below, is the slide showing their current product development priorities.
Disc: Held in RL but not on SM
$WTC reported its FY23 results this morning and I’ll be joining RW for the call at 10:00. But in advance of that here’s my quick take. Bottom line – keep on Truckin’.
Their Highlights
- FY23 Total Revenue of $816.8 million, up 29% (up 21% organically) on FY22
- CargoWise recurring revenue of $650.1 million, up 48% (up 37% organically) on FY22, driven by existing and new customer growth including new Large Global Freight Forwarder (LGFF) rollouts
- Executed a strategic move into North American landside logistics with acquisitions of Envase Technologies and Blume Global, extending and strengthening WiseTech’s position in one of its six key development priorities
- Signed first global customs rollout with world’s largest freight forwarder, Kuehne+Nagel (K+N); post year-end momentum with expansion of FedEx global rollout to include global customs
- EBITDA ex. M&A costs of $412.1 million up 28% on FY22. EBITDA of $385.7 million up 21% on FY22
- Organic EBITDA margin up 2 percentage points (pp) to 53%, reflecting enhanced operating leverage, new product releases, pricing and ongoing financial discipline. EBITDA margin of 47%, down 3pp on FY22 reflecting recent M&A
- Underlying NPAT 3 of $247.6 million, up 30% on FY22; with statutory NPAT of $212.2 million, up 9%
- Strong free cash flow of $291.4 million, up 23% on FY22
- Final dividend of 8.40 cents per share (cps), up 31% on FY22 and representing a payout ratio of 20% of Underlying NPAT
My Analysis
Everything said about $WTC has to be understood in the context that the market has priced it to perfection, with the SP having run up over 70% since the start of the year.
The numbers speak for themselves, so I don’t need to write much about them.
What I will focus on is that, after such a stellar FY21-FY-22 comparison, there is the potential for disappointment in today’s result. However, I am not disappointed and I believe the market consensus shows that many analysts are just not doing their jobs properly. There is no other way to explain it.
While organic revenue growth of 21% was a smidge below my model of 22%, EBITDA growth of +28% (excluding impacts of M&A) was stronger than I expected.
RW has signalled the big step up in R&D spend, and this is to be expected. With several tuck-in acquisitions and the larger Envase and Blume – leaders in North American landside logistics – total R&D (capitalised and non-capitalised) increased a whopping 45% to $261.9m. But I am glad $WTC is doing this, as they need to continue to invest heavily to achieve the long term vision.
Because of the impacts of the acquisitions, expenses are elevated and margins are reduced from EBITDA down to NPAT. There is also a healthy tax bill.
This is an established pattern for $WTC, and over the coming 2-3 years we will see margins grind back upwards as integration proceeds. Over the years, $WTC has achieved a core capability in integrating acquisitions. Envas eand Blume are at the larger scale, so their margin impacts are largers. This is not without risk, but I have a high level of confidence in the team.
There is always a lot to highlight in the $WTC disclosures. For me the standout one this year is that today, the $WTC portfolio covers territories and activity they estimate account for 55% of global manufactured tradeflow. With the developments in progress and the global rollouts under way, they expect that to expand to c. 70% over the coming years.
Another standout, is that the DHL rollout appears to have followed the K-N lead by including global customs as part of the scope. This was the big announcement last year, and the belief was that after K-N taking the plunge, other leaders would follow. So that appears to be playing out.
My Key Takeaways
A good result, but the market (which I say has behaved independent of newsflow through the year in driving up the SP, as funds have increased exposure to the ASX best quality larger cap tech play) has priced $WTC for perfection.
Earlier this year, after a deep dive, I valued $WTC at $71.00 (with a wide range of scenarios ranging from $49 to $84).
Presented recently with the opportunity to sell some at $88, I took the money, selling down one-third of my RL holding. Partly because I expect the market may well cool to this result. If we see a solid pullback over the coming weeks, which I think could happen, I’ll be waiting. ;-) (... but I'm not a trader!!)
A great company. A good result. But it is in the valuation in my view.
About to join RW for his call.
Disc: Held in RL
In this third and final straw supporting my recent valuation of $WTC, I examine the cost structure of the business and set out the rationale for its evolution over time. I conclude with some remarks about risks.
Straw 1 assessed the competitive market opportunity and identified the potential for $WTC to grow over the 20 years 2022 to 2042 as it establishes the operating system for global logistics. Under the scenarios modelled, $WTC grows to achieve between 5% and 10% share of the global logistics software market, up from an estimated 1% today. So, while by any measure it’s a Bull Case analysis, it's one that doesn’t require global domination! Straw 2 then explored how $WTC grows revenues from existing customers, by analysing how each existing customer “cohort” has grown over time. The analysis showed that $WTC likely has a decade or more of strong growth locked in from those customers it has already contracted today. Beyond that, if it expands its customer offering to encompass the entire logistics ecosystem, it will not run out of growth headroom any time soon.
What remains for this straw is to examine the profitability (cost structure) of $WTC and analyse how this might evolve over time. The approach is simple:
- Start by understanding $WTC margin evolution to date
- Develop a peer group of global industry software leaders, establishing these as possible long term futures for $WTC
- Assess the high-level similarities and differences, leading to the scenarios for $WTC cost structure evolution.
1. Margin Evolution to Date
Figure 1 and Figure 2 show the evolution of Cost of Sales and Expenses, respectively, both as a % of revenue.
Figure 1 $WTC Cost of Sales as a % of Revenue
Source: Company Accounts
Figure 2 Expenses as a % of Revenue
Source: Company Accounts
In both cases, the period from 2017 to 2020 saw increasing costs, followed by clear downward trends in the last two years. These trends are easy to explain. Between 2016 and 2020, $WTC acquired 28 businesses, both expanding its global market footprint and acquiring functionality to be integrated into Cargowise, as noted in Straw 2. The acquired businesses were generally small, with high relative costs contributing to the progressive erosion of % margins. This has been communicated clearly in investor presentations over the last 5 years.
Over the last two years, $WTC has undertaken an efficiency drive, removing overheads and turning off legacy platforms as the functionality has been progressively integrated into Cargowise. This led to both Gross Margin increasing to 85%, and Expenses have been driven down to 45%. Again, CEO Richard White (RW) has explained this clearly over recent presentations.
Over time, I expect the general trend of increasing margins to continue as operating leverage progressively expands. Of course, it won’t be a linear process. For example, the three most recent and historically large acquisitions will likely temporarily move margins backwards again. In the case of the 2023 acquisitions, these will be run as separate software programs, while $WTC takes time to figure out the best way to integrate them into the Cargowise stack. However, even if the transition takes 2-3 years, it is not going to be material in the overall scheme of the next twenty years. $WTC now has a track record and an established internal capability of integrating acquisitions and driving efficiency.
So, the key question in developing the valuation was to evaluate how these margins might be expected to evolve into the future, over the long term.
2. Margins in the Global Software Giants
To understand how margins at $WTC might reasonably evolve over the next two decade, a group of global software giants who have already made the journey to scale were considered. The “Peer Group” selected are shown in Figure 3, with their current revenues compared with $WTC’s current and future modelled revenues. Note that the vertical axis is a log scale! We might think of $WTC here on Strawman as a big company, but when viewed through a global lens, it really is still a Baby Giant – or perhaps at least an adolescent.
Figure 3: Revenues for $WTC (Actual and Modelled) and the Global Software Peer Group
Source: Company Accounts
Considerations in selecting the peer group:
- Intuit – similar in revenue today to that modelled for $WTC for 2042
- SAP and Oracle – global competitors, already active in the logistics software ecosystem (focus on Transport Management Systems)
- Salesforce and Adobe – global pure SaaS players
- Microsoft – a giant, diversified, much more than software but likely shows a limit on G&A operating leverage
3 Evaluating Margin Evolution at $WTC
3.1 Gross Margin
First up, gross margin. Figure 4 shows how the Peer Group compares with $WTC.
Figure 4: % Gross Margin
Source: Company Accounts
First, we can ignore $MSFT. With its hardware and cloud computing divisions, it will have lower gross margins than the pureplay software cos.
The clear leaders are $ADBE and $ORCL, with GMs of 88% and 86% respectively. Looking at $WTC, even though it is two orders of magnitude smaller than these giants, %GM has gone from 81% to 85% as the business has scaled and acquisitions integrated into the unified Cargowise platform. At this level it already surpasses the remaining members of the Peer Group. Therefore, I have modelled that as $WTC scales, %GM expands to achieve the best-in-class level of 88% of $ADBE by 2042. I’ve modelled this as a steady progression over time although, in reality, things will ebb and flow, particularly as $WTC continues to acquire capability and market position through M&A. I haven’t varied this between different modelled scenarios as I don’t consider it to be a significant uncertainty. Conceivably, it might under- or over-shoot, but this is a relatively unimportant sensitivity in the SP.
3.2 Expenses
Next comes the expense categories Sales and Markets (S&M), Research and Development (R&D) and General and Administration (G&A), including their embedded components of depreciation and amortisation. The analysis is shown in Figure 5.
Figure 5: Expenses
Source: Company Accounts
Let’s consider each element in turn.
Sales and Marketing
Operating leverage has seen S&M% for $WTC fall rapidly from 14% to 8%, which is remarkably already significantly lower than the peer group, including $MSFT which has huge brand value. Reasons for this probably lie in its B2B and logistics sector pureplay focus, plus its established brand value in the global freight-forwarder segment. While it is possible that $WTC will continue to enjoy further operating leverage, there is an argument that the game gets harder from here on. Hitherto, most of its growth has come from its core capability of freight-forwarding, where it is already a market leader. Over time, as it seeks to enter and then build a leadership position in other parts of the software ecosystem for logistics (discussed in Straw 1), it will face increased competition from the players already established in those segments (think $ORCL and $SAP in global transportation). In order to reflect this expected increased competition, I’ve held %S&M spend constant at 8% in all scenarios modelled. Another argument to hold it at a constant %, is that as new modules are added to Cargowise, there will be an ongoing need to engage existing cusomters to make the case for extending global rollouts. Of course, it shouldn't be a hard sell at customer efficiencies should propel the business case for adoption.
G&A
Again, %G&A has fallen from 20% to 15% from 2019 to 2022. G&A is an expense segment where economics of scale should continue to apply. This can be clearly seen when we look at the Peer Group. $WTC is assumed to progressively reduce %G&A as it scales to a limit of 7%, consistent with that achieved by $SAP and $ADBE. The valuation is probably conservative in that $WTC’s industry focus and software pureplay business model likely means that a leaner corporate structure relative to the competition should be achievable. The gap from 7% to the 3% achieved by $MSFT and $ORCL is further potential upside in the valuation.
R&D
R&D is the largest expense and strategically most important. In the model, I assume that $WTC maintains a relatively high R&D spend – 16% in the high valuation scenarios and 20% in the lower valuation scenarios. The reasons are clear. If $WTC is to succeed in building the operating system for global logistics over the next 20 years, it will have to continue to extend the existing platform. For the platform to be attractive to customers, they will need to continually invest to reduce the friction of customers moving from their existing solutions and onto Cargowise in a way that helps customers reduce their costs. $WTC will therefore need to continually refresh its technology stack to stay at the cutting edge of user experience and information technology, including ML, AI and process automation. This will require perennial investment as well as attracting, developing and retaining top talent.
$WTC’s focus on logistics confers an advantage over its key competitors $SAP and $ORCL, who have to invest in developing solutions for a much wider range of industries and functions. $WTC’s focus will facilitate its ultimate success.
3.3 Bringing it all together
The relative focus on different margin levers will vary with time. RW has demonstrated in presentations over recent year that $WTC has a lot optionality in how resources are allocated. For example, when to push on M&A to accelerate the development of functionality (2016-2019) or when to focus on consolidation and driving efficiency (2020-2022). To date, $WTC has demonstrated that these levers can be pulled without impacting the momentum of revenue growth and supporting customers in their global rollouts.
This is where $WTC's global network of implementation partners is key. The partners (logistics IT consultants) do the heavy lifting of helping customers in their multi-year global rollouts (process mapping, change mangement etc.). The economics of the consulting business is essentially the cost+ model constrained my manpower. By having external partners bear this load, this further enables $WTC to retain a lean organisation model and to not be capacity constrained in supporting customer implementations.
RISKS
I briefly summarise three key risks as follows:
- Leadership: RW is the founder, major shareholder and leader of $WTC. As investors we like that, but the market has little visibility of the breadth and depth of the leadership bench below him. Several years ago, when the Bucephulus short report came out, management (RW) looked shaky in their ability to respond. This was widely perceived in the market and no doubt sent a warning shot across RW’s and the Board's bows. Developing the leadership bench and board strength will continue to be an important issue. Hopefully, RW’s vision will sustain him for decades to come. Equally, $WTC is at a scale that another capable leader should be able to take it forward should, for any reason, RW no longer be around. As investors, we have to trust the Board is regularly reviewing the succession plans, but it is perhaps a question to put the Board on notice at the AGM.
- Technology: $WTC continues to invest heavily in their SaaS platform, and with it disrupt many of the solutions currently in place in the industry. But all new technologies may in time themselves be disrupted. A key potentially disruptive technology in logistics is blockchain. RW has told me (2020) that this is a technology $WTC is tracking, and at this stage they don’t see it as a competitive threat. But it is one to watch as several initiatives are underway across the global in applying blockchain in supply chain management.
- Competition: $WTC’s progress to date has leveraged their leadership in the global freight-forwarding segment. However, the investment thesis relies on them succeeding across the entire global logistics ecosystem. Inevitably, they will have to take on leaders in other segments of this market (see Straw 1). It must be an open question as to whether they will succeed and, if they do succeed, what margins will ultimately be achieved.
- Cyber Security: $WTC holds mission critical data and entire process flows for its clients. A serious data security breach could disrupt operations, damage reputation and open the firm to a world of pain (e.g. litigation). I can't assess this risk, so the only way to manage it is through limiting position size.
CONCLUSIONS
When I started this deep dive, WTC’s SP was in the mid-$50s. When modelling outputs fell consistently in the range $49 to $98, I decided that risk and reward were heavily skewed to the upside. Today with the SP as $73 the market has also moved on. With the analysis described in these three straws, I have a framework to continue to track $WTC’s progress over the years. As I have gone into different aspects of the business, I feel that the market is probably now at fair value. That said, I have hopefully explained some of the areas in which there is scope for $WTC to continue to surprise to the upside. It remains my largest and highest conviction holding.
Disc: Held RL (6.0%). Not held in SM
This is the second of a series of straws that sets out the basis for my latest valuation of $WTC of $71, which was generated following a deepdive I conducted on the logistics sector earlier this year.
In my first Straw (“Straw 1”), I tested my long-term revenue growth scenario assumptions to see if they made sense in a competitive context, considering the wider systems ecosytem in global logistics. In this straw, I look at historical drivers of growth, using insights from an analysis of historical performance. In performing this analysis, I have gone back over some of the detail Richard White (RW) has shared with investors over the last 4 years.
1. How Enterprise Customer Growth Happens
With SaaS, it can be easy to think about revenue drivers as number of customers multiplied by average revenue per customer (ARPC). At one level, that’s correct. It can be a good way of understanding growth in a simple, retail product, where a customer subscribes to a product (e.g., MS Office 365), pays the annual subscription, and renews it every year. And where perhaps ARPC can be increased by selling more modules to a customers (e.g., make it Pro, add Visio etc.)
However, the reality of enterprise software is often more complex. Customer adoption can take many years as customers are onboarded, the solution is integrated into the workflows, incremental functionality is added over time, and organisational efficiencies extracted. This is often described as “land and expand”. But in cases like $WTC it’s more like “land, roll-out (to functions, business segments, and geographies), consolidate, expand, deploy to acquisitions and repeat”. The last bit is when the customer acquires a business and then deploys the software (and standardised processes) to the acquired entity.
In the FY2019 Presentation RW gave us a worked example of what this looked like at one of $WTC’s customers. This is shown in Figure 1. The diagram shows the growth trajectory in a single customer where Cargowise was rolled out to 11,500 users across 58 countries over several years. Cargowise revenues are based on both the number of seats (users) and the volume of cargo transactions flowing through the platform. The graph illustrates that after the first onboarding, the rollout and adoption of Cargowise drives a 7 year first wave of revenue growth, followed by a second wave of another 3+ years (presumably as new functionality is included), and a third wave of step up in revenue when the customer acquires another freight-forwarder.
Of course, as the business grows organically over this time, so too does the use of Cargowise (seats and volumes) and with it $WTC revenues. This real example from 2019 shows a decade of growth from one $WTC customer. To provide some quantification of this, SaaS firms often report a “net revenue retention” rate.
Figure 1: Example of a Global Rollout
Source: $WTC FY2019 Results Investor Presentation, slide 28
With 11,500 users in the case example above, it is worth noting that the global freight forwarders are large organisations. I’ve looked up total employees at a few as follows: UPS (534,000), DHL (400,000), Kuehne + Nagel (78,000) and DSV (75,000). These are truly global companies with a presence in typically 50-100 countries or more. So, rolling out a system across such an enterprise takes years.
Now wind the clock forward to 1HFY23 to look at the progression of customer additions shown in Figure 2. Note the number of large customers added since 2019. Given that Figure 1 showed data from a global rollout that must have begun 7-10 years before 2019, then clearly the step up in new customers during FY21, FY22 and FY23 each have up to a decade of revenue growth to run. In fact, RW reported at 1HFY23, that $WTC currently has 15 global rollouts in progress, and that 4 new global rollouts have been contracted since 1 July 2022. It is worth noting that some of the logos on the list are among the world’s Top25 Global Freight Forwarders.
Figure 2:
Source: $WTC 1H FY23 Results Presentation, slide 20
2. Quantifying Global Growth – Cohort Analysis
So, the question is, how material and long-lived is the growth that is built into the existing customer base?
To understand this, we need to turn to the appendix of the 1H FY23 results presentation, slide 28 provides the “cohort analysis” of customers based on the year in which they were contracted. This is shown in Figure 3.
While the detailed numbers on the graph are not provided by $WTC, I’ve had a go at reading the results presented. (Warning: these are my estimates off the graph – shown in red and purple text – however, I am broadly comfortable with the results since the total values are known.) I’ve summarised the results in Table 1.
Figure 3: Analysis of Customer Cohort Growth
Source: $WTC 1H FY23 Results Presentation, slide 28
Table 1: Summary of Customer Cohort Growth Analysis
Source: Analysis of growth rates implied by data in Figure 3
The picture is remarkable. It shows is that Cargowise revenue from customers onboard during FY06 and earlier, grew at a CAGR of 29% from 2015 through 2022 – a period ending at least 16 years after initial onboarding. The cohorts onboarded from 2007 to 2015 achieved a CAGR of a slightly less impressive 24% - a period where all cohorts had been onboard for between 7 and 15 years.
What’s interesting when you look at Figure 3 is that, over the last two years, the rate of growth appears to be accelerating, reflecting the step up in major new customer wins shown in the last three years in Figure 2.
3. What Does It All Mean
In “Straw 1”, I undertook a high-level analysis of the potential for revenues at $WTC to grow over 20 years as it pursues its ambition of building the operating system for global logistics. That analysis noted that, although the historical focus has been on Global Freight Forwarders (a minor part of total global logistics services), the 31 acquisitions undertaken by $WTC in the last 7 years already span nearly all parts of the global logistics ecosystem. Now, many of today’s customers are much more than just Global Freight Forwarders. Many, such as Maersk, DB Group, UPS and FedEx to name a few, are fully integrated global logistics providers.
The cohort analysis presented in this straw shows that $WTC’s existing customers have the potential to support growth of 20-30% per annum for at least the next decade and well into a second, without adding any new customers! So, over time, the strategic challenge for $WTC is less about acquiring new customers, and more about broadening and deepening the penetration of a fully-functioning Cargowise solution into its customers operations.
Above that, further growth will over time come by integrating $WTC’s customers’ customers into the Cargowise ecosystem using CargoWise Neo.
In Straw 1, my central valuation scenario assumes revenue growth for the next year of 24% progressively trending down year by year to 10% by 2042. The key insight of the cohort analysis in this straw is that once a customer contracts to use Cargowise, it can grow revenues strongly for long periods of time as it rolls out the system to all countries and divisions, switches on more and more functionality, experiences its own organic volume growth, and from time to time experiences steps changes in growth due to acquistions.
When I started generating the various revenue growth scenarios in my model, I was initially nervous about extending signfiicant growth into a second decade. Having concluded the deep-dive, Straw 1 tells me that it is entirely plausible given the market opportunity. This Straw indicates that the progress over the last two decades shows no maturation of growth and that revenue growth from customers can grow at rates signfiicantly greater than 20% for decades.
If anything, I leave the exercise wondering if I have been too conservative.
Up Next
Straw 3 will examine the final piece – “Margin Evolution.”
Disc: Held IRL; not on SM
Several weeks ago, I posted my valuation for $WTC. This was the culmination of a deep dive into the company and its industry. (I've held $WTC IRL since Sept-2016. I don't hold it on SM, because the company has proven itself. All my SM holdings are yet to do so.)
This is the first of several straws over the the coming weeks (and months?) where I unpack my research and assumptions that lead to the valuation.
To understand the global market runway and the competition ahead of $WTC is it important to understand the overall global logistics market, and the role software plays in that market. Valuing $WTC has involved making projections of the company over the next 20 years, as this is the timeframe I believe it will take to achieve its vision of creating the operating system for the global logistics industry.
In this straw I ask the basic question: do the revenue projections in the model (shown at the end of the straw in Figure 5) make sense in a competitive market context.? My conclusion is that they do.
1. The Global Logistics Market
The global logistics market is huge, estimated today to be around $7,000 bn. Of course, most of this market is not addressable by $WTC (think operating big ships, planes, trains, trucks, and vans, warehouses, and all the fuel and people to drive/fly/sail them.) However, it is a vast global market which drives the opportunity for software to enable it and to make it more efficient.
Arriving at the above figure, I identified 10 studies estimating the global logistics market in 2021 to range from US$6,300 bn to US$10,700 bn. These identified growth rates over the next 3 to 10 years varying widely between 4% and 10%. The major drivers of growth to be significantly above global GDP growth (average c. 3%) are: ongoing global e-commerce growth; ongoing unbundling of supply chains enabled by technology; opportunities for value-adding services by supply chain service providers; and greater participation of middle income countries in international trade.
Conservatively, I’ve assumed a market size of US$7,000bn in 2019 growing at 5% for the next 23 years, reaching US$22,000bn in 2042. In considering this growth, I have considered current unfolding trends of re-shoring and East-West decoupling, which have the potential to reduce global trade, while equally creating new inefficiencies and higher overall supply chain costs.
Figure 1 provides an estimate of the elements of the global logistics industry. Here you can see transportation, warehousing, and distribution make up the lion’s share. It is interesting to note that freight-forwarding, where $WTC has developed a core capability, represents a very small component of the overall industry.
Figure 1 Estimate of the Current Global Logistics Market
Sources: Estimates using Technavio (2020) “Global Logistics Services Market 2020-2024”; Logistics Management (2020) “2019 State of Logistics Report”, Armstrong and Armstrong “Top 50 Global Freight Forwarders”
2. The Global Logistics Software Market
Estimating the size of the global market for logistics software systems is more challenging. This is due to a combination of factors: 1) different studies choose different definitions and boundaries; 2) I have not purchased the studies themselves, so have been unable to get into the details of each (as each is worth several thousand dollars); 3) many market participants are privately held, so identifying revenues is not straightforward and 4) some of the giant enterprise software companies in the space (e.g., SAP and Oracle) don’t break out the revenues for their supply chain solutions.
Complications aside, I have reviewed 9 sources and estimated the size of the global market for logistics software solutions to be in the range of US$30 - US$50 bn, taking US$40bn as the central estimate. I have rejected some higher estimates (up to $74bn), as these appear to include revenue from technologies such as RFID-related systems and devices.
As a point of triangulation, the US listed firm E2Open estimates the global market at US$54bn in their 10-K, however, no sources were provided. In any event, I am happy that my estimate is on the conservative side of things.
Growth over the next decade is typically estimated to lie in the range of 8% to 12% p.a., or at roughly twice the rate of the underlying logistics market. This is hardly surprising for several reasons. First, global rollouts of best-in-class systems are a relatively recent phenomenon. Firms are progressively embracing digitalisation. Many have decided to move beyond limited, legacy in-house systems, and/or their existing ERPs. Across the board, adoption of cloud-based solutions, including by legacy ERP providers like SAP and Oracle, are becoming the norm.
Modelling Assumptions:
· Global logistics software market 2019 = US$40 bn;
· CAGR 2019-2029 = 10%; CAGR 2029-2042 = 5%
· Global logistics software market in 2042 = $US200 bn
Based on these figures, the industry currently spends c. 0.6% of its revenues on software. This rises to 0.9% by 2042.
The return on this investment is huge, even if unquantified: savings in direct labour; better asset utilisation; and delivery of value-adding customer services enabled by leveraging data and improved visibility and transparency.
3. Structure of the Software Industry
The global logistics software industry today is highly fragmented. Figure 2. provides one visualisation of the current software ecosystem supporting the global logistics industry. Having spent over 6 years attending $WTC presentations, this was a revelation to me. It is important to note that each box contains only the leaders in each market segment, there are many more minor players, and in-house “home-grown” solutions are excluded, unless these have been commercialised outside their original "home".
Interestingly, while each segment of the industry has several leaders ($WTC being one in the Freight-Forwarding Software segment – look carefully and you’ll find Cargowise in the central box on the bottom row), no industry participant is a leader in more than one segment. Even the ERP software giants SAP’s and Oracle’s leadership positions are only in the Transportation Management Systems segment. I estimate (from several sources) that to be the largest segment at c. 25% of the total market – unsurprising given Figure 1.
My assessment is incomplete, as I have not analysed if there are individual companies owning multiple software solutions in multiple segments. That’s for the “to do” list, but I didn’t come across any examples. (See also comments below about industry consolidation.)
Figure 2: Map of the Global Logistics Industry Software Market
Source: Alcott Global (2022) “2021 Put Logistics Technology on the Map”
Historically, initial industry focus was providing software for enterprise planning and scheduling of transport and distribution, enabling transactions and operations between manufacturers and distributors, and transport asset optimisation. An important source of initial code generation in the 1990’s was demand from the internal supply chains of international corporations (e.g., FMCG, pharmaceuticals, consumer electronics, automotive etc. when I grew up as an operatoins manager!). These were the early actors to aggressively ride the globalisation wave that created global supply chains.
With increasing globalisation, outsourcing/offshoring and unbundling of integrated supply chains, over time, the focus has shifted to increasing the end-to-end visibility through the supply chain, digitalisation of workflows and documentation, establishing and managing master data, increasing automation, and recently using advanced analytics for simulation and optimisation. More recently customer service has increasingly become a focus, increasing the visibility of customers into their supply chains. (As end customers, over recent years, we’ve all gained the ability to track our e-commerce orders from order processing through to the van arriving at our address from an initial source anywhere in the world.)
In parallel, enterprise systems on premises have transitioned to systems deployed via the cloud, with enterprise data held in the cloud. These latter innovations are still at early stages of adoption, with $WTC a key player. This trend has further enabled data access and data flow across supply chain participants. Importantly, it has also provided a huge data asset to both supply chain participants, 3PL/4PL players, and their software providers. For example, in 2020 $WTC reported that CargoWise handled 50 bn transactions globally, and in 2022 it reported that the software was active in jurisdictions covering 90% of global trade flows.
Despite these trends evolving for 30 to 40 years, it is important to recognise that many activities within global logistics still use dated legacy systems requiring human intervention (yes, spreadsheets!), multiple data entry(leading to waste and errors), and systems that don’t “talk to each other”.
Therefore, thinking out to 2042 (another 20 years away), based on an underlying industry growth of 5% p.a., with ongoing tailwinds from e-commerce, digitalisation and enabling of work flows, through-chain visibility, automation, and optimisation - there is going to be a lot of sustained innovation, growth, and investment in an industry that remains highly fragmented.
I’ve therefore assumed the overall software industry supporting global logistics services continues to grow at an annual rate of 10% to 2032 falling to 5% p.a. for the decade after that. This might be conservative - again, that is by design.
On this basis, the c. $40bn logistics software market today should be worth c. $200bn in 2042.
A “sense-check” of these projections follows: In 2019 software represented c. 0.6% of the industry cost structure. Under this projection, it rises to 0.9% by 2042. That investment supports increased labour productivity as well as improved asset utilisation, realistically driving improvements an order of magnitude greater than the increased software costs.
4. Wisetech’s Industry Position Today and Strategy for Tomorrow
As shown in Figure 3 (below), $WTC’s core capability lies in systems to support the international freight forwarding industry - the blue bit in the middle of the diagram. However, as we saw in Figure 1 (above), freight forwarding is only one small, albeit vitally important part of the overall global logistics industry – around 3% of total industry revenues. It is, however, a segment where IT systems are disproportionately important.
However, $WTC’s vision is to become the overall operating system for global logistics! which is what the image below is intended to convey (Note: while the terminology in Figure 3 is a bit different to Figure 2, you can see that the $WTC vision spans the lion’s share of the ecosystem.)
Figure 3
Source: $WTC Investor Presentation, 1H FY23.
In 2019, $WTC’s revenues of A$348m represented only 0.7% share of the global logistics software market. (Interestingly, before I started this deep dive, I wrote down in my journal that I thought the number would be 4-6%! I was almost an order or magnitude out.)
Across the modelled growth scenarios supporting my valuation, by 2042 $WTC revenues range from A$10.5bn to $21.1bn (see Figure 5 at the end of this Straw). This would be between 4% - 8% of the global systems market share. (Assuming A$=US$0.75)
To be clear, in this high-level analysis, I am not trying to generate long terms predictions of what the market will look like. Rather, I am trying to satisfy myself that the long-term revenue growth scenarios modelled out for two decades are plausible given the overall scale, growth, and current/potential future industry structures.
The takeaway of this “back of the envelope” estimate is to observe that, if $WTC succeeds over the next 20 years in building a leading global operating system for the logistics industry (as it has done over the last 20 years in global freight forwarding), then the strong, sustained revenue growth figures assumed in the valuation scenarios would ultimately see 4% - 8% of all global logistics software system spend being in $WTC solutions. That’s a good share of a global market, but by no means beyond the realms of plausibility. It is consistent with a long-term industry structure where several large players share sizeable but minority portions of the market, leaving ample space for leading niche solutions in specialist subsectors of the market or in serving particular industry verticals (e.g. pharmaceuticals, automotive etc.)
5. Industry Consolidation - $WTC already doing its bit
Today, as Figure 2 shows, the industry today is highly fragmented. Over time, it is likely to mature and consolidate. In fact, this has already been underway for several years, with $WTC playing its part.
$WTC is a leader in the freight-forwarding segment. However (as shown in the excellent summary straw by @Magneto), since 2016 $WTC has executed 31 acquisitions across the software eco-system including in: Transport Management Systems across shipping, air, road, rail, and port/terminal including container optimisation; Freight management systems; Warehousing Systems; Customs, Tariffs and Compliance Systems; Trucking Systems for Couriers; Cargo Visibility Systems; and Automation.
While I have not analysed M&A activity in the sector, I have not come across any evidence to indicate that other industry players have been as active across the entire logistics eco-system. On the contrary, Figure 2 appears to indicate that few if any industry players are leaders in more than one segment. So, it appears that $WTC is an early mover in seeking to build a solution to serve all parts of the industry.
What is also clear, is that $WTC have recently stepped up the ambition. The 2023 acquisitions of Blume and Envase represent a higher level of materiality in building out from $WTC’s core capability in international freight forwarding, a market where it is starting to dominate. Figure 4 below shows both the recent acquisitions feature as leading systems in their own rights outside of $WTC’s core capability.
Most companies acquired over the last 7 years were usually small (mostly <$20m) until the more recent larger acquisitions of Containerchain (Feb 2019, $492m), Envase (Jan 2023, $230m) and Blume Global (Feb 2023, $414m).
Figure 4: Acquisitions in N. American Landside Logistics Materially Builds out $WTC capability
6. Risks - Other Possible Futures
Valuation requires future quantitative projections, but those projections are not a prediction of what the future will be. The future is uncertain. Many futures other than those considered here are possible. Let’s consider two extremes.
In the extreme success case, which has not been modelled, $WTC becomes a dominant player not only in freight forwarding, but across the industry. If you like, the “Microsoft of global logistics”. In that case, its ultimate market share could be much higher than 4% to 8%. (After all, if you think about the global market for spreadsheets, Excel has 79%, Google Sheets has 16%, Apple Numbers has 5% - although Excel has been at it for 38 years!)
But there is also an extreme Bear Case. Perhaps there is an alternative future, when completely new applications based on a disruptive technology, such as Blockchain, emerges. Such a disruptor could conceivably mean that $WTC never achieves its long-term ambition. So, it will be important to keep an eye on emerging disruptions, particularly Blockchain. Once every couple of years, I ask RW how $WTC perceives this threat. According to RW, so far, so good. (However, incumbents often fail to see disruption until it’s too late!)
So far, $WTC has proven itself to be adept at operating at global scale, successfully identifying and integrating acquisitions across the globe (an important capability), while simulatneously investing heavily in developing the CargoWise platform, acquiring new customers, supporting customer growth over many years, while consistently expanding gross margins and operating margins. There is a lot to be positive about.
7. My Final Take-Aways
In this straw, I wanted to consider the revenue projections in my current valuation scenarios (see latest Valuation, and revenue extract below in Figure 5) in terms of the current market in which $WTC operates, and how that market might evolve over the next two decades. I learned a lot doing the work, and I hope that at least some here will find it interesting, and also share any alternative perspectives they have.
My own bias is clear. I am a $WTC bull. It is one of the top 5 holdings in my RL portfolio, and incremental sell-downs over the years have long returned the initial investments made.
While its metrics might not be quite as strong as $PME, it is not far short of that. And importantly, while $PME is playing in a global market that today is about $3-5bn in value, $WTC's market is an order of magnitude greater and even more highly fragmented.
I believe Richard White to be a unique leader in developing and globally deploying software that is enabling an industry that accounts for some 9% of global GDP. There are few Australians in a similar position. Not bad for someone who started out in the 80's with a spreadsheet to track the equipment for AC/DC worldwide tours!
Figure 5: Valuation Revenue Scenarios
Disc: Held RL (5.5%)
I am currently in the middle of a deep dive to update my valuation of $WTC, following latest results. (Teaser, preliminary work on Bull Case points to very significant valuation upside potential, with the observation that for the 6+ years I have held $WTC, the market has consistently been playing catch up ... this is a characteristic often seen with long-term great companies, because valuation methods just don't run a strong growth trajectory out far enough, before reverting to a more pedestrian industry-level growth.)
As part of any valuation,I usually try and assess where the compeition is at, partly because most management teams don't really help us with this and often equity analysts also aren't much good either, unless they cover multiple firms in a sector. Add to that, competitors are often privately held, so getting the data can be a challenge.
Anyway, I know several of us use Google Trends as a rough, inferential way of identifying trends in competitive positioning. I wanted to share some analysis I have just done comparing Cargowise ($WTCs platform) with two comparison groups:
- Figure 1, leading Freight Management Systems and
- Figure 2, leading Customs Management Systems. (I have more work to do to make sure I have the correct peer groups)
Historically, the data is noisey, but over the last 12-18 months, we are starting to see a strong signal above the noise. My bull case is (and has been for several years) that $WTC ultimately achieves market dominance as the "operating system" for global logistics, which is a huge market with massive potential for digitalisation to reduce friction and increase efficiency.
Both figures support the Bull Case.
Figure 2 is also interesting when you consider the recently annouced Kuehne + Nagel deal selecting CargoWise for their Customs system, having a reputation in the industry (as I understand it) for using their own systems. (No wonder Richard White gave prominence to this at the latest results.)
Grist to the mill.
Figure 1: 5-year trend for Freight Management Systems
Figure 2: 5-year Trends for Customs Management Systems
In addition to the raw Google Trends outputs above (which you can easily run for yourself), I have run the data through a smoothing fliter (11-point, central moving average) to help make the trends clearer, shown in Figures 3 and 4, below.
Figure 3
Figure 4
Note: Descrates Systems Group acquired Questaweb in early 2021.
Disc: Held IRL (5.3%)
I attended the $WTC 1H FY23 results call today, with CEO Richard White (RW) and CFO Andrew Cartledge. My earlier straw picked out the results highlights, which I will not repeat here, other than to discuss the guidance update. My main focus will be on some of the more strategic insights that came from presentation and discussion. So this straw is structured as follows:
- Results
- Guidance Update
- North American Landside Logistics
- Customer Win Kuehne+Nagel - #1 Top 25 Global Freight Forwarder Global Customs Rollout
- My Takeaways
There is always such great content in the $WTC presentation – today was no exception.
1. Results
On results, I re-iterate that they were standout on just about every dimension. Figure 1 is Slide 23 from the Appendix is a good overview of just how strong they are when compared on the 1H22 result, which was also great. And just to complete the picture, FCF growth of +53% compares with +85% in 1H FY22 over PCP. However, in the latest period there was both a return to acquisitions and a big step up in investment in the product platform, which flows on to new capability and price increases.
(Just to put both cash flow numbers in context, my current valuation of $63.60 (which now needs updating) assumes annual FCF growth of only 27% moderating progressively to 18% over the decade ahead. I return to this at the end of this straw.)
Figure 1 Key Operating Metrics (slide 32)
2. Update to Guidance
FY23 revenue guidance was increased from $755m-$780m to $790m-$820m, to reflect inorganic contributions from Shipamax, Envase, and Blume which add $35m-$42m. consequently, EBITDA is reduced by $(5)m - $(3)m from the three, and by $(30)m one time acquisition costs.
Looking at revenue, this would mean that H2 growth to PCP would only be 17%-26%, whereas H1 growth over PCP was 35%.
The discussion with the analysts tried to pin this down. For example, to what extent is this due to a slowdown in global freight movements? RW made clear that freight volumes are a relatively small driver of revenues, and they are not seeing volumes fall on the platform because there are 43 major customer rollouts under way.
I noted in my earlier straw on the Blume acquisition (the largest of the three by far), that it is forecast to grow at 45% to 55% from FY23 to FY24. (Call me suspicious, but I think I now know why they didn’t give a growth rate for FY22 to FY23!!)
When challenged, RW reiterated that CargoWise (increasingly the dominant part of the business) is expected to grow revenue at 30%-40% annually over the medium to long term.
Despite all the discussion, I can’t make sense of the new guidance numbers. No doubt we will see some commentary on this in the analyst reports.
One hypothesis I have, is that RW has taken the opportunity of today’s stand out result to build some headroom in the guidance to allow for any delays in deals closing or some contingency for when they get to see inside the acquisitions properly. Who can blame him if that’s true, as we all know the market is unforgiving on a guidance miss.
3. The North American Landside Logistics Build-Out
Envase and Blume (Figure 2) are important steps in building out land-side logistics in North America, the world’s largest and most fragmented logistics markets, the first of $WTC key development priorities (Figure 3). These 6 priorities are the key areas for investment needed to turn $WTC (Cargowise) into the “operating system for global logistics”.
Figure 2 (Slide 19)
Figure 3 (Slide 17)
First of all, RW said integration would be easy, using $WTC’s proven “integration machine”. Both Envase and Blume are SaaS platforms and will be offered as modules within CargoWise using webservices, so there won’t need to be a customer migration process as there has been for earlier acquisitions. This will then give the product team time to figure out how best to develop and integrate the code and capabilities over time (a “fade-in-face-out” approach).
In the past, revenues from acquisitions have usually declined over time, because the service revenues (a lot of body-shop work) provided to clients becomes redundant as functionality is folded into the CargoWise SaaS environment. That is not expected to be the case for Envase and Blume, because of the integration strategy and existing SaaS platforms.
RW articulated two major aspects of value to customers. First, it gives North American customers full transparency and visibility across all modes of the land-based supply chain. This is a challenge today because of the large number of vendors and systems. Second, it gives international customers using sea and air freight into North America, greater visibility and transparency to their end customers in North America. RW said that, while today, the North American logistics market is locally efficient, it is difficult for international customers, because of different standards and conventions. Finally, it develops a more complete and integrated capability to be rolled out in future, particularly to Asia-Pacific.
(As a side note, I am positively struck by the amount of transparency being given in the appendix as to organic and inorganic financial and value drivers. I think RW has learned the lesson from the January 2020 Short Report. Long term holders will know what I mean! I have fond memories of arguing with the Bucephulus author on HC that he didn't understand the $WTC acquisition strategy.)
3. Customer Win Kuehne+Nagel - #1 Top 25 Global Freight Forwarder Global Customs Rollout
The second most significant insight from the presentation was RW celebrating the recently signed deal with Kuehne-Nagel to provide their customes compliance solution.
Customs Compliance is a capability $WTC has spent 5 years investing in. To secure the world’s largest customs clearing agent is something RW sees as transformational – “a watershed deal”. This is an industry space with “40 to 50 systems from hundreds of vendors.” To date, it is one area where (it was implied) $WTC hasn’t achieved that much traction with clients. However, RW believes that with the world’s largest player choosing them, many others will now follow. Global customers today must deal with multiple solution suppliers, with many systems and many contracts. With Cargowise, having “one system, one supplier, and one contract is much more efficient.”
When asked how material he thought this market could be RW said, “It is large. We don’t know quite how large. But then again, when the iPhone was invented no-one knew the potential size of the smartphone market.” Over the last 6 years, I have heard RW speak on many occasions. He does use colourful metaphors, but I have never found them to be inappropriate over time. So, this made me sit up.
As with all CargoWise contracts, the K-N deal is structured with revenue driven by “seats+transactions”. It will be a multi-year rollout. So if RW is right, then this deal opens another decade and more of new growth as industry participants follow the leader and adopt the solution over the coming years. Many will already be existing customers.
4. My (One) Takeaway
I’m not going to refer to the FY23 guidance. It is perfectly fine, and also its not that important, regardless of what the analysts will write in the next few days. Rather, my overall takeaway is that over time I become more and more convinced that $WTC will succeed in building THE operating system for global logistics. They are well on the way and there are many years if not decades to go.
If you look in the Appendix, slide 28 (Figure 4) shows the annual cohort revenue analysis. Look at the bottom light blue “Customers from FY06 and Prior”. Not only is this growing, the curve has started accelerating again over the last two years. This means that these customers are completing rollouts and/or adding seats and/or handling more volume and/or buying more modules and paying increasing prices. Just think what that means. Collectively those customer who came onboard 17+ years ago, are continuing to grow their adoption and use each year adding increasing incremental revenue every year.
Now that's a quality business, even ignoring all the customers who have come onboard since 2006. So now take a look at figure 5. (The prosecution rests.)
Figure 4 (Slide 28)
Figure 5 (Slide 20)
Given that $WTC exists to solve problems for global logistics, removing friction, increasing transparency and efficiency, then maybe, just maybe, winning as a global logistics player will in part come down to who can most effectively adopt an end-to-end operating system. And $WTC is leading the race to become the global operating system. What does this mean for valuation? I don’t know yet and I will take some time to update my model.
However, I currently have a CV FCF growth of 7% after 10 years of higher growth. Such a big number usually makes me nervous. Perhaps I need to add another decade of explicit growth of 15% or more?
In any event. My valuation is going up. Knowing this, I purchased more $WTC this morning during the call at $55.58. I think that is going to prove to be a good investment in 5-10 years time! (I love it when the NASDAQ has a bad day.)
Disc: Held IRL (now 4.8%)
@Strawman I nominate $WTC for a BabyGiants discussion. Will it become a global industry giant?
The market likes Wisetech's results.
- Revenue up 23% in line with guidance
- EBITDA up 17%
- 38% of revenue was from acquired businesses
- NPAT flat at $52.6m due to increased D&A. With new shares issues, per share earnings were down 4% to 16.4c
- Cash at $223m and $190m in undrawn debt
- Reduced trade volmues probably took $10-20m off second half revenue
- Expecting roughly 9-19% revenue growth in FY21 and 22-42% EBITDA growth
At face value, results appear very strong and the business very resiliant.
But as noted elsewhere, there are concerns over various accounting issues (capitalisation of a large amount of R&D and customer acquisition among others. See here for the Bucephalus Short thesis).
I simply havent done the deep dive to really have a firm view one way or the other. Even if the issues pointed out by the shorts are largely correct, so long as Wisetech can continue to raise cheap capital and successfully integrate and upsell new customers, it could still ultimately succeed.
If the share price weakens considerably, it'll be much harder to sustain the current aggressive acquisition led model and there is much greater dilution potential for existing shareholders.
On latest numbers, shares now trade at a PE of 152 and P/S of 18. Though that's ostensibly high, if the business is indeed cash profitable and considerably larger in 5-10 years, with attractive margins, there's actually a reasonable argument for value. They have a great position in a very large and fast growing market and favourable operating leverage potential.
Of course, if growth ambitions fall short, and the expected SaaS scale benefits -- in terms of real, fully accounted for cash operating costs -- don't materialise, shareholders will likely face significant loss.
For me, the risk/reward dynamic is not attractive enough at the current price.
Results presentation here
