WiseTech surge no reflection of result
The logistics software company remains at a hefty premium to the fair value estimate of Morningstar’s Gareth James.
Mentioned: WiseTech Global Ltd (WTC)
Morningstar analyst Gareth James has left his earnings forecasts for WiseTech unchanged and is surprised by the 30 per cent jump in the freight software provider’s share price.
WiseTech Global (ASX: WTC) surged by close to 34 per cent on Wednesday to finish at $27.87 after a 197 per cent leap in full-year net profit attributable to equity holders.
The profit of $160.8 million was helped by revenue from its freight software CargoWise, which jumped by 20 per cent.
WiseTech, whose narrow-moat rating reflects a ten-year competitive advantage, will pay a final dividend of 1.6 cents per share, fully franked, lower from 1.95 cents per share, fully franked.
Despite previously coming under attack from short-sellers, the company has risen by 165 per cent since 19 March, against a 27.8 per cent rise for the broader market.
According to James’ valuation, the stock is significantly overvalued, trading at a 244 premium to his fair value estimate of $8.30.
Wednesday’s share price surge is not justified by the financial result, James says.
“We were somewhat surprised by the 30 per cent share price jump which followed the result,” he says, “considering the result was in line with recently provided guidance and fiscal 2021 guidance was broadly in line with consensus forecasts, although the top end of EBITDA guidance may have provided some surprise.”
WiseTech Global (WTC) Price vs. Fair Value
Source: Morningstar Premium
WiseTech's reported revenue and EBITDA of $429 million and $127 million respectively was in line with guidance it provided in April this year.
Management provided fiscal 2021 earnings forecasts for the first time with the result, comprising revenue of between $470 and $510 million, implying 10 to 19 per cent growth versus the prior year, and underlying EBITDA of $155 million to $180 million, implying growth of 22 to 42 per cent.
James says this guidance is in line with his, largely unchanged, revenue and EBITDA forecasts of $510 million and $170 million, respectively.
WiseTech Global was founded in 1994 as a software provider to the Australian logistics sector and has since grown to become a leading global provider of logistics software as a service, or SaaS.
The company has more than 6000 customers, including 19 of the 20 largest third-party global logistics providers, and a customer retention rate of over 99 per cent.
WiseTech’s business model generates revenue based on the extent to which customers use its software rather than a traditional subscription model, which usually offers unlimited use within a set time frame.
James’ earnings forecasts are largely unchanged and include an earnings per share compound annual growth rate of 20 per cent over the next decade.
“Our fair value implies a fiscal 2021 price/earnings, or P/E, ratio of 30, or 54 if all research and development costs were expensed.
“In contrast, the market price of $27 implies a P/E ratio of 98, or 174 with all research and development costs expensed, and we continue to believe the stock is significantly overvalued.”
A higher P/E ratio shows that investors are willing to pay a higher share price today because of growth expectations in the future.
Further growth for WiseTech depends on successful investment in research and development, James says.
“WiseTech could also struggle to compete with much larger competitors such as SAP and Oracle, should they take a more targeted approach to logistics software.”
Read Gareth James’ full report on WiseTech here.
This article is part of Morningstar's Reporting Season 2020 coverage. The calendar will be updated daily to connect you with our equity analysts' take on the financial results.