The Aussie tech with 80% profit growth

Logistics may be the less ‘sexy’ side of technology, but it’s paying off. Global supply chain issues have forced many transportation companies to revisit efficient practices. Logistics software has become a key part of the solution.

Cloud-based logistics software company WiseTech (ASX: WTC) today announced an 80% profit increase to $447.9 million.

James Delaney, Portfolio Manager at Sage Capital, says the result came in at the higher end of guidance but wasn’t unexpected.

“The numbers were great steady results where they demonstrated continual growth from existing client wins and rollouts with previous client wins.”

He believes it's been hard to fault WiseTech’s operational execution in reaching this point, though this is offset by valuations.

In this wire, James shares some of the highlights from WiseTech’s FY22 result, and gives us his outlook on the company and its sector for the year ahead.

WiseTech (ASX: WTC) FY22 key results

Note: This interview took place on Wednesday 24 August. James' analysis supports the investments held in the CC Sage Capital Equity Plus Fund portfolio.

Managed Fund

CC Sage Capital Equity Plus

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What were the key takeaways from this result? What surprised you the most?

WiseTech updated their guidance in mid-July and the result came in towards the top-end of that guidance. The guidance for next year was broadly in line with those brokers who moved numbers. The numbers were great steady results where they demonstrated continual growth from existing client wins and rollouts with previous client wins. Pleasingly, they showed some pricing power to offset new inflation pressures on staffing which has been a big theme throughout the entire reporting season. 

The surprising thing for me was the quality of the result. Operating cash flow was very strong, well ahead of consensus. Pre-cash flow was very strong. There wasn’t anything funny around the accounting. 

The percentage of software expenses that were capitalised rather than expensed actually dropped. All in all, a very clean result and probably one of the best numbers they’ve printed in the last four years.

What was the market’s reaction to this result? Was this an overreaction, an under reaction or appropriate?

WiseTech had a very strong result but the stock had been strong going into it. It’s up around 11% and that’s the top end of what I thought it would get to. The numbers themselves were in line with where recent consensus had moved to. The stock was up 35% in the last quarter – that’s a big move – and then to go up another 11% today. That’s a pretty large reaction. The technology space has been reasonably tepid over the last few weeks as interest rates have started to trace up. The reaction has been a bit higher than I expected.

Would you buy, hold or sell WiseTech on the back of these results?

HOLD

You’ve got strong operational performance and expensive valuations balancing each other out. It’s really hard to fault their operational execution over the last three years.

The questions raised by those short reports circulating years ago have been put to rest. They’ve really demonstrated strong organic growth and impressive operating leverage post the aggressive land grab acquisitions just before COVID. Operating margins at the business have gone from 30% to 50% and they’ve shifted all their clients off their legacy acquired platforms onto their flagship CargoWise – one freight forwarding platform. With that, you’ve seen scale and better quality results and, in turn, really strong free cashflow results.

The operational side has been pretty close to flawless over the last couple of years but valuation is counteracting that. Unlike almost all other ASX-listed tech stocks, WiseTech’s valuation is within a dollar and close to all-time highs. It’s up 60% on the calendar year-to-date. It’s probably the best performer within the large-cap software space on the ASX. On the other side, WiseTech’s valuation is going to be sensitive to long-term interest rates like other growth stocks. Interest rates have more than doubled over the last year. It’s hard to chase WiseTech here given its strong performance to date.

What’s your outlook on WiseTech and its sector over FY23?

The main drivers of WiseTech are new customer growth and rollouts with existing customers. They signed two freight forwarders in the second half of the financial year. One of them was UPS. That’s a pretty good win, and they had three earlier in the year. The new client wins are going to underpin a minimum of double-digit revenue growth over the next few years.

They’ve got good growth prospects, but there are risks to the top-end of their guidance around economic conditions.

Are there any risks to this company and its sector that investors should be aware of given the current market environment?

For WiseTech specifically, it’s the key man risk. Richard White as the founder and CEO has been there forever. He’s critical to company success and the business appears to be highly reliant on him and structured around him. You have to consider for a long-term hold what Richard White is going to do.

For the sector overall, it’s pretty common for high price-to-earnings growth stocks like technology to see share prices swing around rapidly. This is due to shifts in risk appetite or interest rates if your business is growing strongly over longer periods of time.

There’s more value in the future years’ earnings. If long-term interest rates move up, you need to discount those future cashflows at higher rates. We saw a valuation crunch late last year into the middle of this year. Many high price stocks just de-rated and not through any operational talk of their own. It was just due to a valuation and risk appetite change. Since then, we’ve had a bit of a relief rally with interest rates re-tracing slightly. Since the start of August, they are trending up again globally. If that trend continues, it will make it very hard for technology stocks with high PEs to outperform in this market.

From 1-5, where 1 is cheap and 5 is expensive, how much value are you seeing in the market right now? Are you excited or are you cautious on the market in general?

Rating = 4

I’m probably cautious on the market in general. We removed some of the craziness in terms of valuations that we had late last year with concept stocks reaching multi-million dollar valuations. The difference is now earnings expectations in the market, especially from the sell side, remain too high. The average profit margin of ASX industrials is well ahead of long-term trends. They really need to come back down before I start to see some value emerging. That will require earnings downgrades and lower forward expectations for the market. Once that happens, you can get to a view of the market that is priced. Beyond that, it could get cheaper if you go into a recession until you start to bounce out of it.

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