After earnings, 2 positives for Wisetech
Wisetech share price tanked as it reported a squeeze on margins in its outlook but there are several positives for investors.
Mentioned: WiseTech Global Ltd (WTC)
In its full year results, WiseTech’s (ASX: WTC) guidance on its margin growth and earnings for fiscal 2024 disappointed the market, spurring a 20% fall in its share price on the day of its profit announcement.
However, there was plenty to like in its results. WiseTech reported a 30% lift in net profit while its margins grew 28%. The company also reported a 31% increase in its final dividend.
It’s a business that Morningstar analyst Roy van Keulen has been bullish on and has previously highlighted a number of reasons of why he is impressed with WiseTech even describing it as a “kingmaker”. With the company a little sombre on its outlook, is the future still rosy for the logistics software business?
Consistent high investment returns
Despite the disappointing guidance, what impressed van Keulen most about its fiscal result was WiseTech’s “continued ability to generate high returns on its investments”.
In his analysis on WiseTech’s fiscal 2023 result, the Morningstar analyst calculated the payback time on the company’s investments “remains among the best in the world and continues to exceed our expectations”.
In particular, WiseTech spent $226 million on sales and marketing and product design and development in fiscal 2022, which resulted in $152 million in incremental organic revenue for fiscal 2023. On van Keulen’s calculations, this exceeds his expectation of a 1.6 year payback.
“We are unaware of any publicly listed SaaS businesses with similar business efficiency.”
Based on management guidance, the Morningstar analyst estimates that WiseTech’s payback period for fiscal 2024 will again be “world-leading”, at around two years. This is despite recent purchases in North America of Envase Technologies and Blume Global
“The slower payback period reflects the larger share of WiseTech’s acquired businesses, which have lower business efficiency compared with WiseTech’s in-house developed CargoWise business”.
Exemplary capital allocation
This exceptional return on investment goes hand-in-hand with WiseTech’s “exemplary capital allocation skills”. Capital allocation is key for businesses, minimising unnecessary spend, ensures investors get a good return on their investment.
“Throughout its history and especially since the COVID-19 pandemic, WiseTech has demonstrated a remarkable inclination toward investing countercyclically, which has been antithetical to the broader tech sector,” van Keulen said.
“Whereas the broader tech sector hired aggressively after the onset of the pandemic, at elevated salaries, and acquired businesses at high multiples, WiseTech stopped its M&A activity and held its operating expenses flat through 2022.”
However, when interest rates began inching upwards and tech companies started selling off and laying off staff, “WiseTech, acting in line with the saying “buy when there is blood on the street” resumed its M&A activity, making its two largest acquisitions to date, and expanded headcount in product design and development by 80% through fiscal 2023”.
van Keulen expects this acceleration in product investment to continue delivering high returns for WiseTech, as a product-led company, both from improvements to its current product suite as well as from new product launches, such as the newly released CargoWise Neo and Warehouse Suite