WiseTech Global (WTC) – Sell
WTC reported a very strong FY18 result, which came in ahead of consensus and company guidance. Compared to previous corresponding period (pcp) revenue was up +44.1%, operating earnings (EBITDA) up +44.7%, and underlying NPAT up +26.6%.
|Date of Report||ASX||Price||Price Target||Analyst Recommendation|
|Date of Report|
|Sector : Information Technology||52-Week Range: A$6.96 – 25.00|
|Industry: Software||Market Cap: A$7,134.3m|
We rate WTC as a Sell for the following reasons:
- Trading at a significant premium to domestic and global peers – premium of 110% on one year forward revenue estimates (BTIG).
- FY18 guidance confirmation at the 1H18 result effectively was a downgrade given this included recent acquisitions.
- Organic growth could slow, which may no longer warrant such a lofty valuation.
- Management noting that revenues from recent acquisitions actually declined and offered little margin. This means the return from these acquisitions could take longer than management’s expectations.
- Competitive threat (new product/technological advancements).
- Disruption to technology (data breach).
- Adverse currency movements.
We see the following key risks to our investment thesis:
- Market leading position (significantly ahead of the nearest competitor).
- Growing global trade and increasingly globalization of products sold.
- High degree of revenue visibility & low customer annual attrition rates.
- R&D spend will ensure product/services are enhancing WTC products.
- Scalability of the business model.
Figure 1: WTC Revenue by Region
WTC reported a very strong FY18 result, which came in ahead of consensus and company guidance. Compared to previous corresponding period (pcp) revenue was up +44.1%, operating earnings (EBITDA) up +44.7%, and underlying NPAT up +26.6%
FY18 revenue of $221.6m was ahead of consensus estimate of $215m and EBITDA of $78m was ahead of estimate of $74.7m. Further, management provided a solid outlook for FY19, noting that they expect FY19 EBITDA to rise by +28–35% year-on-year to $100-105m.
FY19 revenue guidance of $315–325m is ahead of the pre-announcement consensus estimates of $287.1m. The guidance implies EBITDA margins to decline by ~300bps, with management noting that acquisitions are typically lower margin and it takes a number of years to increase the margin to WTC group level.
We have updated our earnings estimates and valuations for latest peer group multiples, which has resulted in our PT increasing to $16.60. We continue to highly rate WTC, its platform, strong management team and opportunities from increased market penetration, new product uptake and global growth opportunities. We appreciate given the growth opportunity at hand it may be difficult to apply conventional valuation methodologies.
Nonetheless, we believe we are adequately accounting for significant growth over a 10-year period and then into perpetuity in our valuation. We still struggle to meet the current share price. We maintain sell given our price target is substantially below the current price.
- FY18 headline results. Overall, a very strong result with group revenue up 44.1% to $221.6m and representing a CAGR of +41% over the last 5 years. Operating earnings (EBITDA) growth of +44.7% to $78m was largely in line with revenue growth rate, with margins stable at 35%. Group EBITDA has see +43% CAGR over the last 5 years. Both revenue and EBITDA exceeded management’s full year guidance. Underlying NPAT was up +26.6%, much as less than earnings growth, due to higher D&A, interest and tax expense.
- M&A set to continue, however a margin detraction in the short-term. Strategic bolt on acquisitions again played an important role in expanding WTC’s presence over the world in FY18. During the year, the Company made 22 acquisitions in Europe, Asia and the Americas of leading customs or freight forwarder providers. Management noted that these targeted acquisitions provide safer, faster and stronger entry into new key markets. In the short term, the acquisitions to adversely impact EBITDA margins, however management is confident to increasing these margins towards WTC group level over time.
- Outlook. Management expects FY19 revenue to be in the range of $315-325m, representing growth of +42-47% year on year, and EBITDA of $100-105m, that is growth of +28-35%. The guidance implies EBITDA margin of 31.7 – 32.3% versus FY18 margin of 35.2%.
- Our valuation. We have updated our earnings estimates post the results release and now sit slightly above management’s guidance for FY19 at the revenue and EBITDA line. We now ascribe a 50% premium to WTC’s EV/Sales valuation versus peers compared to the current share price implying a premium of approximately 110% (on our estimates). We use a DCF ($14.71) and EV/Sales ($18.55) valuations to arrive at our blended valuation of A$16.60 (rounded to the nearest ten cents).
FY18 RESULTS SUMMARY…
Figure 3: FY18 P&L and drivers
Source: Company, BTIG
FY18 headline results. Overall, a very strong result with group revenue up 44.1% to $221.6m and representing a CAGR of +41% over the last 5 years. Operating earnings (EBITDA) growth of +44.7% to $78m was largely in line with revenue growth rate, with margins stable at 35%. Group EBITDA has seen +43% CAGR over the last 5 years. Both revenue and EBITDA exceeded management’s full year guidance. Underlying NPAT was up +26.6%, driven by higher D&A, interest and tax expense.
Outlook. Management expects FY19 revenue to be in the range of $315-325m, representing growth of +42-47% year on year, and EBITDA of $100-105m, that is growth of +28-35%. The guidance implies EBITDA margin of 31.7 – 32.3% versus FY18 margin of 35.2%.
VALUATION – DCF (A$14.71) / EV/SALES (A$18.55) …
We have update our earnings estimates post the results release and now sit slightly above management’s guidance for FY19 at the revenue and EBITDA line. We now ascribe a 50% premium to WTC’s EV/Sales valuation versus peers compared to the current share price implying a premium of approximately 110% (on our estimates).
Figure 4: EV/Revenue multiple valuations
Source: BTIG estimates, Bloomberg
Figure 5: WTC Global SaaS comps group
Figure 6: WTC Financial Summary
Source: BTIG estimates, Company, Bloomberg
WiseTech Global (WTC), founded in October 1994, is a leading provider of software to the logistics services industry globally. WTC develops, sells and implement software solutions that enable logistics service providers to facilitate the movement and storage of goods and information domestically and internationally. WTC’s software assists their customers to better address and adapt to the complexities of the logistics industry while increasing their productivity, reducing costs and mitigating risks. WTC services over 6,000 customers across more than 115 countries with offices in Australia, New Zealand, China, Singapore, South Africa, United Kingdom and the United States.
Recommendation Rating Guide
|Recommendation Rating Guide||Total Return Expectations on a 12-mth view|
|Speculative Buy||Greater than +30%|
|Buy||Greater than +10%|
|Neutral||Greater than 0%|
|Sell||Less than -10%|
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