$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

Richard White has been consistent and heavy seller of shares on-market over the last few months

In March he had the following:

Direct: 4,023,716 Indirect: 121,877,028

There have been 14 separate announcements of him selling on market.

He now retains:

Direct: 2,250,646 Indirect: 121,539,911 (so he has about 80 million dollars in cash burning a hole in his pocket now)

On the flip side, Morningstar now rate Wisetech as a 5 star buy. You'll have to look up their criteria for this.

The economist recently published their "Money talks" podcast on supply chains and one of the main points was its increasing conversion to a modern, cloud based system from legacy systems. For those of us who were members of MFPro when Joe and Matt were first introducing WTC, much of the bull case revolved around this huge swing (similar to the change of mainframe to cloud based servers) which is still in evolution, and it being in a market leading position to benefit from this.

I haven't really kept up with where WTC are, and how they have been tracking. It got too hard to compare like with like, given COVID and then massive supply chain disruptions. Plus there was all this FUD around the high acquisition rate and likely indigestion from so many different new software systems. However, as a company that fits many of the criteria that Strawpeople like, it is surprising how little discussion it generates. Maybe because of its size.

This is one company I hope to understand a bit better of the next year or so, as it may well get beaten down even further in a global recession, whilst quietly laying the groundwork to be extremely profitable when trade picks up again.

Would love any insights others may have

The short thesis on Wisetech from Hong Kong based research house Bucephalus.

https://www.youtube.com/watch?v=XonmN_3nPAs

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:

Richard White Interview with Tom Piotrowski, CommSec Executive Series, 15 March 2018

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.

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