Wisetech (WTC) offers a cloud-based solution to the global logistics industry. Enabling and empowering the world’s supply chains the glossy tagline on the first page of its annual report. Half-year results are on February 23. Full-year guidance of $600-635m requires 18-25% revenue growth which was reaffirmed back in November. Peak margin growth was one concern commented on following its full-year results in August last year. One important point to take away from its August results was the very high level of recurring revenue it generates. Recurring revenue in FY21 was 90% of total revenue. That is impressive. Sticky customs are important to long term success in any business. Customer loss was below 1% for the ninth year in a row. COVID has essentially amplified the strategic value of its signature product, CargoWise. Revenue for CargoWise was up 26% in FY21. The product allows companies to execute complex transactions and manage operations on a signal database. It helps lower operating costs, reduce IT/infrastructure costs and assists in scaling according to the brochure. The structural shift accelerated by COVID has positioned Wisetech well. The spotlight on logistics and global supply chains has never shone brighter, been more critical or been as visible in ensuring the movement of goods around the world. Limited capacity and congestion have meant logistics providers are accelerating the replacement of old in-house systems. There is also a significant level of sector consolidation happening. WTC benefits from this activity as its customers are either the acquirer, or its platform is in place in the acquired business and then adopted by the acquirer.

Main observations:

• ROE of 16.9% is ok, expected to improve next year then drop back a touch.
• Good to see EPS growth outpacing revenue growth.
• A PE of 96.5x is not cheap but we know you are paying for future earnings given its status as a growth business.
• A yield of 0.3% is a bit irrelevant. This is not what you’d consider an income stock.
• There are no obvious listed competitors on the ASX. Panasonic subsidiary Blue Yonder, is one of its main peers.
• Panasonic acquired the business for US$7.1bn back in April last year. WTC's market cap is more than $15bn for comparison.
• Based on a few testimonials, WTC is considered a better product.

What sort of investment is WTC?

Wisetech is a growth company and one that’s had its fair share of AFR headlines, short attacks and criticism. Its financial position is solid supported by a strong balance sheet and cash flows. Cash was more than $315m at the end of the FY21 financial year but no more acquisitions are on the cards it seems. CEO Richard White back in August said WTC had finished its acquisition led-growth strategy. Operating cash flows were up 57% in FY21. A 20% payout of net profit is what management targets although the yield is a bit irrelevant at ~0.3%. WTC has completed a staggering 39 acquisitions since its IPO in 2016. The pace of acquisitions slowing in recent periods as it looks to bed down what it hasn’t already and focus on maximising synergies. Penetration has improved recently with WTC signing FedEx post last June. Ten of the top 25 Global Freight Forwarders have rollouts on the CargoWise platform with revenue contributions expected to grow over time given the lengthy adoption process. “Once you sign these players, they grow with you for years and years,” said Mr White. WiseTech, counts DHL, DSV, Kuehne + Nagel, CH Robinson and Maersk in its customer base. Cost-cutting is one thing to look out for in upcoming results, WTC is on track to cut ~$40m of fat from operations in FY22, ahead of forecasts of $20-30m. EBITDA growth of 26-38% is expected as well. Margins will be the maker and breaker of results this season.

Broker stuff

Brokers are more positive than negative. The more recent commentary from Citi and Macquarie in January. Citi is expecting strong results added it doesn’t think there will be much influence from Omicron although cites rising costs as one possible headwind. Bit of an obvious statement when inflation has been the biggest financial headline of recent months. Citi’s target price of 4890c implies upside of more than 15%. Macquarie said the outlook for WTC remains unchanged. Target price was raised 18% to 5400c. Upside of 26.6% implied.

Technical view

No clear trend but the general direction for the share price has been higher for the last two years. Up more than 50% since February 7, 2020. The big pop back in August followed full-year results which came in well ahead of consensus although it finished well off highs with the bears fighting back. The stock is down more than 30% in the last month. RSI has just moved back from oversold territory. MACD forest is still below the signal line which is a bearish indicator, but momentum is improving. You would want to see more positive price action before getting involved. Results on February 23 are the next catalyst for the share price.

Top investors

Realwise holdings which is a company controlled by founder and CEO Richard White offloaded more than 4m shares at the end of the year. White still owns more than 40% following the transaction so it’s a bit of a drop in the ocean. Investment company Baillie Gifford the only other notable transaction, picked up more than 3m shares at the end of 2021.

Shorting

On a three-year chart the decrease in short interest is obvious although there has been a spike this year with hawkish central banks leading the shorters back to high growth business.

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