Australian Tech with 80% Profit Growth – Sara Allen

The consensus is that it’s been a tough year for tech companies. But this Australian company clearly missed the memo, posting stellar FY22 results today. It all boils down to essential software.

Logistics may be the less ‘sexy’ side of technology, but it is paying off. Global supply chain issues have forced many transportation companies to review 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 was at the higher end of the guide but was not unexpected.

“The numbers were consistent great results demonstrating continued revenue growth from existing customers and launches with revenue from previous customers.”

He believes it has been difficult to criticize WiseTech’s operational execution to get to this point, although this is offset by valuations.

In this cable, James shares some of the highlights from WiseTech’s FY22 results and gives us his perspective on the company and its industry for the coming year.

James Delaney of Sage Capital

WiseTech (ASX:WTC) FY22 Key Results

  • Revenue increased 25% to A$632.2 million
  • CargoWise revenue increased 37% to A$447.9 million
  • NPAT up to 80% at $A194.6m
  • EBIT increased 70% to A$255.0 million
  • EBITDA increased 54% to A$319.0 million
  • Net assets $A1,315.2m
  • Investment in innovation and product development grows 8%
  • Free cash flow increased 71% to A$237.3 million
  • Earnings per share rise 71% to 55.8c
  • Complementary dividend of 6.4c, 66% more
  • FY23 revenue forecast $755m-$780m

Note: This interview was conducted on Wednesday, August 24. James’s research supports investments held in the CC Sage Capital Equity Plus Fund portfolio.

managed fund

CC Sage Capital EquityPlus

Australian Stocks

What were the key points of this result? What surprised you the most?

WiseTech updated their guide in mid-July and the result was close to the top end of that guide. Guidance for next year was broadly in line with those riders who moved numbers. The numbers were consistent great results demonstrating continued revenue growth from existing customers and launches with revenue from previous customers. Fortunately, they showed some pricing power to offset new inflationary pressures on staffing, which has been a major theme throughout the reporting season.

The surprising thing for me was the quality of the result. Operating cash flow was very strong, well above consensus. Previous cash flow was very strong. There was nothing fun about accounting.

The percentage of software expenses that were capitalized rather than expensed decreased. All in all, a very clean result and probably one of the best numbers they have printed in the last four years.

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

It has been a very interesting reaction.

WiseTech had a very strong result, but the stock had been strong going into it. It’s up about 11% and that’s the high end of where I thought it would be. The numbers themselves were in line with where recent consensus had moved. The stock is up 35% last quarter, that’s a big move, and then it’s up another 11% today. That’s a pretty big reaction. The tech space has been reasonably warm for the past few weeks as interest rates have started to rise. The reaction has been a little higher than I expected.

WiseTech 1-year share prices. Source: ASX

Would you buy, hold or sell WiseTech based on these results?

HOLD

Based on these results, where he’s moved and how strong he’s been, he’s a support to me.

It has strong operating performance and expensive valuations that balance each other out. It’s really hard to fault their operational execution over the last three years.

The questions raised by those brief reports that circulated years ago have been resolved. They have really shown strong organic growth and impressive operating leverage after aggressive land grab acquisitions just before COVID. Operating margins at the company have gone from 30% to 50% and they have moved all of their customers from their acquired legacy platforms to their flagship, CargoWise, a freight forwarding platform. With that, you’ve seen better quality and scale results and, in turn, really strong free cash flow results.

The operational side has been pretty close to flawless in recent years, but valuation is countering that. Unlike nearly every other ASX-traded tech stock, WiseTech’s valuation is within a dollar and near all-time highs. It’s up 60% calendar year to date. It is probably the best performer within the large cap software space on ASX. On the other hand, WiseTech’s valuation is going to be sensitive to long-term interest rates like other growth stocks. Interest rates have more than doubled in the last year. It’s hard to chase WiseTech here because of their strong performance to date.

What is your perspective on WiseTech and your industry during FY23?

WiseTech’s main drivers are new customer growth and launches with existing customers. Two freight forwarders signed in the second half of the year. One of them was UPS. That’s a pretty good win, and they had three earlier in the year. New customer gains will support minimal double-digit revenue growth for years to come.

They have good growth prospects, but there are risks at the upper end of their guidance around economic conditions.

Your guidance on the coming year is interesting. They have assumptions that economic conditions are similar to how they were in FY22. There’s a little bit of risk around that. If the world sinks into a recession within the next year, WiseTech is somewhat sensitive to container volumes. This is how they make a lot of their money. It is probably an optimistic view of conditions. Confidence around the world continues to be shaken. Consumer confidence is horrible in Europe, Australia and the world right now. There are downside risks of a tightening cycle causing a slowdown over the next year. I think WiseTech may experience an impact. It shouldn’t stop its growth, but it may affect the consensus in the coming year.

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

For WiseTech specifically, it’s point man risk. Richard White, as founder and CEO, has been there forever. It is fundamental to the success of the company and the business seems to be very dependent on it and structured around it. You have to consider for long-term retention what Richard White will do.

For the sector as a whole, it is quite common for high-growth P/E stocks such as technology to see share prices swing rapidly. This is due to changes in risk appetite or interest rates if your business grows strongly over longer periods of time.

There is more value in future years’ earnings. If long-term interest rates rise, you must discount those future cash flows at higher rates. We saw a valuation crisis at the end of last year until the middle of this year. Many high-priced stocks simply downgraded and not through any trading conversation of their own. It was only due to a change in valuation and risk appetite. Since then, we have had a bit of a relief rally with interest rates pulling back slightly. Since the beginning of August, they have been on an upward trend again globally. If that trend continues, it will be very difficult for high PE tech stocks to outperform in this market.

From 1 to 5, where 1 is cheap and 5 is expensive, how much value do you see in the market right now? Are you excited or cautious about the market in general?

Rating = 4

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

See all of our coverage of the August 2022 reporting season

The Livewire team is working with our contributors to provide coverage of a selection of stocks this reporting season. You can access all of our reporting season content by clicking here.

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