EUR 850.00 For Business Accounts Only

Morningstar | Corporate Action: We Recommend WiseTech Shareholders Do Not Subscribe to the SPP

As foreshadowed in our note of March 19, 2019, we recommend shareholders in narrow-moat-rated WiseTech Global do not subscribe for new shares under the share purchase plan, or SPP. WiseTech's current market price of AUD 22.61 is significantly above our fair value estimate of AUD 7.40 per share, implying the shares are significantly overvalued. The SPP is open to shareholders who owned WiseTech Global shares as at 7:00pm on March 18, 2019. The market price and our earnings forecasts imply a fiscal 2020 P/E ratio of 104 or 215 if capitalised research and development costs were expensed. In contrast, our fair value implies a fiscal 2020 P/E of 34 or 71 if capitalised R&D costs were expensed. Our financial model assumes an EPS CAGR of 18% over the next decade, versus 49% over the past four years.

Although the market price is greater than the SPP price, we think the arbitrage opportunity is too risky to be worth the effort for most investors. In theory, WiseTech shareholders can apply for their maximum allocation of AUD 15,000 worth of WiseTech shares under the SPP and immediately sell the shares on-market for an 8% or AUD 1,131 profit at current levels. However, WiseTech Global is an extremely volatile stock and the theoretical profit could easily disappear between the application and issuance of the shares. Investors could hedge the share price risk of the SPP allocation with a short position in contracts for difference, but we expect the complexity and risk of this strategy will be too great for most investors and beyond the regulatory approvals of many advisors.

WiseTech doesn’t have any particularly pressing need for new capital as the company is profitable, generating operating cash flow, and had net cash of AUD 12 million as at Dec. 31, 2018. However, we think it’s a sensible move to capitalise on the very high share price and the implied low cost of capital and the enterprise value/revenue multiple of around 18. The most likely use of funds is for further acquisitions to continue to expand the company’s global geographic footprint and software suite.

The company has already undertaken nine acquisitions this fiscal year, costing AUD 186 million upfront and an average EV/revenue multiple of 2.3. Although acquisitions have provided little profit in the short term, they provide a low-cost entry into new geographies and their founders usually remain with the business, keeping local knowledge and expertise inhouse.

Management have maintained fiscal 2019 revenue guidance at AUD 326 million to 339 million, versus our unchanged forecast of AUD 349 million, and EBITDA guidance at AUD 100 million to AUD 105 million, versus our unchanged forecast of AUD 108 million. Our fiscal NPAT forecast has increased to AUD 55 million from AUD 52 million due to a lower expected interest expense following the capital raising but our EPS forecast is largely unchanged due to the increase in shares on issue.