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Morningstar | WiseTech FVE Increased to AUD 7.40 Following Shrewd Capital Raise. See Updated Analyst Note from 19 Mar 2019

We have increased our fair value estimate for narrow-moat-rated WiseTech Global by 9% to AUD 7.40 per share following the AUD 300 million institutional equity capital raising at AUD 20.90 per share. The issue price was 10% below the market price but more than three times our previous fair value estimate. The increase in our fair value is caused by the issuance of shares at a price which was well in excess of our prior fair value. At the current market price of AUD 22.83, we continue to believe the shares are significantly overvalued.

WiseTech intends to undertake a share purchase plan, or SPP, for retail investors who held shares on March 18, 2019. The SPP will raise a further AUD 30 million at the lessor of AUD 20.90 and the 5-day volume weighted average price before April 11, 2019. An SPP offer booklet will be sent to shareholders on March 27, 2019 and we will provide our recommendation closer to the determination of the offer price. However, considering the current premium of the share price to our fair value, it is unlikely that we will recommend subscribing for new shares.

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, or EV, to 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.

Management 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.

The market price and our earnings forecasts imply a fiscal 2020 P/E ratio of 96 or 199 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 research and development costs were expensed. Our financial model assumes an EPS CAGR of 18% over the next decade, versus 49% over the past four years.

We continue to believe WiseTech is an excellent company with a very good, long-term strategy. We are pleased that the company chose to open its institutional capital raising to multiple institutions. Despite our view that the shares are overvalued, This structure is far more equitable than the the AUD 100 million equity capital raising in May 2018 which was placed with just one investor. We are also pleased that the company is having an SPP, which will mean retail investors won’t be unfairly diluted should they wish to participate.