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Morningstar | WiseTech Global Remains Overvalued Despite Strong 1H Growth

Narrow-moat-rated WiseTech Global’s first-half result was very strong but weaker than we expected, and management’s earnings guidance implies weaker growth in the second half. Considering it’s already late February, we expect guidance will be reasonably accurate and we’ve cut our full-year earnings forecast accordingly. For example, we’ve cut our revenue forecast by 2% to AUD 350 million, although still slightly ahead of guidance of AUD 332 to 335 million, and our EBITDA forecast has fallen 14% to AUD 108 million, also still slightly above guidance of AUD 102 to 107 million.

We’ve also slightly increased our long-term revenue CAGR, offsetting the impact of near-term earnings reductions, and we’ve maintained our fair value estimate at AUD 6.60 per share. Despite the 10% share price fall following the result, at the current market price of AUD 20.68, we continue to believe WiseTech shares are significantly overvalued. The market appears to be assuming much stronger earnings growth than us. However, we are comfortable with our 16% revenue CAGR forecast over the next decade and our long-term EBITDA margin of 40% by 2028, versus management guidance of 33% for fiscal 2019.

Although first-half revenue grew by 68% versus the previous corresponding period, or pcp, the annualised growth rate was about 44% versus the prior period, or 40% excluding foreign exchange benefits. Revenue growth was also significantly boosted by acquisitions and we estimate the underlying revenue growth rate from existing clients was around 10%, versus the prior period annualised. The midpoint of management revenue guidance implies full-year revenue growth of 50%, a second-half growth rate of 39%, and an annualised rate of 26% between the first and second halves. This drop off in growth is understandable considering the likely drop in growth from acquisitions.

WiseTech’s underlying revenue growth rate is important because it likely reflects the medium-term growth rate and is a key consideration when valuing the company. Although we accept that revenue growth is likely to be lumpy, we think the stock needs a higher organic revenue growth rate to justify the current share price. WiseTech has a relatively high enterprise/revenue multiple of about 20, which is well above other high-growth tech "market darlings" Xero, Altium, and Appen.

WiseTech’s headline EBITDA growth rate of 52% significantly trailed its revenue growth rate of 68% and its EBITDA margin compressed to 38% from 40%. This is slightly surprising considering scalable platform businesses with high revenue growth usually exhibit expanding profit margins. Management attributed margin compression to the many, relatively low-margin, acquisitions over the past couple of years and claim the underlying margin was 49%. Management expect the group margin to trend towards this level as acquisitions are fully integrated, however, guidance implies second-half EBITDA growth of 21% versus the pcp and an EBITDA margin of 33%. We assume a long-term EBITDA margin of 40% but if we assume 50%, our fair value increases to about AUD 9. However, we await more evidence of margin improvement before increasing our forecasts.

WiseTech capitalises a material proportion of research and development, or R&D, costs which boosts profits and profit margins. Capitalised R&D was AUD 20 million in the first half and, if expensed, would have reduced EBITDA to AUD 28 million from management’s AUD 49 million. Management also prefer to exclude amortisation of acquired intangible assets from various profit metrics, although it is debateable whether this provides a better indication of underlying profit. If capitalised R&D were expensed, and amortisation of acquired intangible assets included, we estimate first-half NPAT would have been about AUD 13 million, or half the NPATA figure cited by management. A simple annualisation of first-half NPAT on this basis implies a P/E ratio of about 245, which is very expensive.

The relatively capital-light nature of the business means the balance sheet remains in very good shape. The company borrowed about AUD 30 million in the first half but still has a net cash position of AUD 12 million. However, AUD 235 million is owed in deferred payments for completed acquisitions, which we expect to be mainly funded with operating cash flows, and possibly some debt, although net debt is unlikely to become material.