As Wisetech shares surge another 10%, is it worth the price?

Australia’s technology sector has always been a quite concentrated affair, lacking the depth of companies seen in larger offshore markets such as North America and Europe. Last week’s revelation that another of the "WAAAX" stocks – circuit design software firm Altium (ASX: ALU) – would be de-listing after an overseas firm made an offer it couldn't refuse. This is something Tribeca Investment Partners’ Jun Bei Liu emphasised in her assessment of Wednesday's half-yearly result and of Wisetech Global (ASX: WTC) more broadly.

“For any investor looking for growth exposure, we don’t have many options here in Australia, which is why Wisetech is priced at a premium. It remains one of the few remaining high-quality, growth businesses here," said Jun Bei Liu.

On top of the impressive result, which included another raft of new contract wins, that’s another reason for the company’s 10% share price surge in response.

Read the below Q&A to find out whether Jun Bei believes the high price is justified, along with her outlook for the company and the local market.

Key results

• Total revenue +32% year-over-year to $500.4 million

• 46% EBITDA margin, ahead of expectations

• Underlying NPAT +5% to $128.4 million

• Free cash flow +13% to $155.3 million

• Interim dividend +17% to 7.70 cents per share, represents payout ratio of 20% of underlying NPAT

Note: This interview took place on Wednesday 21 February 2024.

1. In one sentence, what was the key takeaway from this result?

It was a very strong result, with a clean set of numbers including very strong revenue, good EBITDA, and excellent free cash flow. It also delivered conservative guidance showing the momentum of the business.

2. Were there any major surprises in this result that you think investors should be aware of?

There was a level of expectation that the result might be a bit disappointing, given five months ago the company warned of slowing momentum. There are also supply chain disruptions in the Red Sea, which investors were worried the company might be affected, but they weren’t, and the result came through very strongly.

3. Would you buy, hold, or sell this stock on the back of this result?

Rating: BUY

We hold Wisetech, and I think it’s a buy. It has demonstrated repeatedly an ability to take market share. In this result, aside from the strong operating metrics, they also discussed the win of another three major freight forwarder contracts, which means Wisetech has signed up 13 of the global top 25 freight forwarders. That’s a great testament to their product.

4. What’s your outlook on this stock and the sector over the year ahead? Are there any risks to this company and its sector that investors should be aware of?

The freight sector itself is experiencing some disruptions, with volumes down because of what’s happening in the Red Sea. But remember, this company is very different. It’s a very small fish in a big pond and is taking market share from the old-school freight forwarders, getting people onto their system that provides more tracking and cost efficiencies. The company always says that during times of supply chain crisis, more clients want to use its product.

The company was also talking about a return to a 30% organic growth rate, which is quite a strong guide. They continue to invest on the R&D front which historically pays off with strong profit and revenue growth.

In terms of risks, this is a growth company and is expensive. This opens the stock to volatility from interest rate expectations, for example in 2022 when people were expecting rates to go higher, the valuation was affected. But in this environment, where the interest rate is pretty stable, the valuation will also be stable. A business of this quality will, I think, be very well underpinned.

5. 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: 3

On Wisetech itself, historically, it is in line with its premium to the market. For a brief time a few months ago, it became a bit cheaper, though with a result like this, it has jumped quite significantly.

More broadly, the ASX 200 is also in more neutral territory, trading in line with historical levels. Within that, some sectors are more expensive, including the tech sector.

Some of the cheaper spaces are in resources and other parts of the cyclical space. But investors need to be mindful that, even though the market looks neutral in terms of valuation, some of the earnings are underestimated. So far, this reporting season has seen more companies beating than missing expectations. Analysts aren’t forecasting the earnings properly; they’re underestimating the revenue resilience and the ability to hold margins.

For any investor looking for growth exposure, we don’t have many options here in Australia, which is why Wisetech is priced at a premium. And with last week’s announcement that Altium will be taken private, WTC remains one of the few remaining high-quality, growth businesses here.

This article first appeared on Livewire Markets.

• Read the announcement – Wisetech Global 1H24 results announcement

• View the presentation – Wisetech Global 1H24 results presentation

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