https://www.copyright link/technolo...s-and-converted-non-believers-20230228-p5cobc
How WiseTech silenced the shorts and converted non-believers
It has become one of Australia’s most successful tech stocks, but it was almost derailed when a significant number of investors believed damning short seller allegations.
Yolanda RedrupRich List Editor
Mar 9, 2023 – 9.00am
When short seller research firm J Capital lobbed its first of three bombshell reports about global logistics tech company WiseTech in mid-October 2019, investors panicked.
The company’s shares plunged more than 21 per cent between the release of the first report and its emergence from a trading halt a few days later – a reaction that seemed reasonable, given the nature of allegations raised about the multibillion-dollar company.
Richard White’s WiseTech has firmly bounced back from the allegations of overstating growth lobbed by J Capital in 2019. Natalie Boog
Taken at face value, the short seller’s key claims of
overstated profits, low organic revenue growthand underperforming acquisitions suggested a company headed for the rocks, given the sheer quantity of acquisitions (34) the business had made since listing in 2016.
While WiseTech co-founder and chief executive Richard White had always maintained the company was not a “roll-up” and had never acquired a company to “buy growth”, the JCap report tapped into an inherent fear from local investors that the company was indeed just that, and that to keep growing it would be
compelled to do more and more deals, requiring more and more capital.
WiseTech was forced to go on the offensive. White made his case not just to the business press, but also under the spotlight of the mainstream media.
An infamous interview on the ABC with journalist Elysse Morgan went viral on social media, when a usually word-perfect White was interrupted by an off-screen colleague throughout the recording, who continually tried to clarify points, while White asked for questions about the company’s auditing practices to be put forward again.
Taking sides
In a case of “who do you believe?” analysts and investors quickly picked their side. Some were adamant JCap’s claims were false and misleading, while others believed that where there was smoke, there was fire.
“The company was not very good at handling Q&A early on,” E&P Financial’s Paul Mason says.
Mason was one of the analysts who landed on WiseTech’s side of the battlefield.
“They came off very scripted a lot of the time, and it was a big red flag for a lot of people,” he says.
“During the height of all of this, everyone in the company was overwhelmed. If you’re innocent, this comes as one of the biggest shocks you could face – who would know what to do in that situation?”
Mason put out a report in defence of the company – a move he knew would put him offside with many in the market – and labelled JCap’s report “complete, utter garbage”.
He pinpointed what he saw as glaring flaws in the report, including that there was no mismatch between cash receipts and reported revenues, and that JCap did not understand the nature of WiseTech’s customers.
It seemingly had a particular problem discerning the difference between those undergoing a “global rollout” of WiseTech’s flagship software CargoWise, and customers that were using it on a much smaller scale.
“I wrote my big rebuttal report in four days – I didn’t go to sleep. I knew the quality of my work was really good, so I didn’t regard it as high-risk, per se... but it was still a short-term risk because a lot of people wanted WiseTech to be a fraud,” Mason says.
“I was talking to my clients in financial markets and a lot of them didn’t like that I took a stand.
“The other thing they didn’t quite get was the way WiseTech was acquiring companies for a specific purpose. They were criticising them from a typical M&A lens where you take out costs and get synergies... but Richard had this 10-year logic [to the deals].”
Rather than doing deals to buy revenue, or extract synergies, WiseTech’s long list of small “tuck-in” acquisitions were made largely to acquire local knowledge and expand its geographic footprint – something White has always said was necessary in a field as complex as logistics.
Although
WiseTech admitted that not all of its acquisitions had been winners, the company was clear that many of its acquired companies would have an initial fall in revenue, as it shut down any services divisions.
Free cashflow is hard to lie about, and it was a step change for this stock.
— Elise Kennedy, Jarden
One of the biggest complaints analyst had with the $21 billion business at the time was the lack of transparency in its earnings – be it from not enough, or too much, disclosure – especially regarding revenue from acquisitions.
This concern compounded with a few other factors to make WiseTech an obvious short target, according to a former analyst who asked not to be named.
“There was an emergence at the time of firms that were short-selling partly to be cool, in a way. There was this rise in being contrarian – it was like you had more substance if you were contrarian to some degree,” they said.
“WiseTech had also been playing this game where they were lowballing their earnings guidance. I kept a spreadsheet of initial guidance and tracked their upgrades, and they were like clockwork ... and when you do that, it looks like you’re trying to play games.”
JCap’s attack knocked more than 30 per cent off the value of WiseTech over a two-month period at a time when other software stocks such as Xero and Altium were charging.
Although some funds, such as TMS Capital, continued to back WiseTech and its management, others such as Fidelity had
already been selling shares before the short report due to hits high valuation.
Things got worse in February 2020, when WiseTech
became one of the first local companies to downgrade its earnings outlook because of the COVID-19 pandemic. JCap accused the company of using the pandemic as an excuse to downgrade earnings, saying the forecast slide was really down to weakness in its core business.
Tide turns
Fast-forward 18 months, however, and even the biggest bears were changing their positions.
For analysts, the tide turned for WiseTech following its August 2021 results announcement.
The company had
halted its acquisition spree a year earlier and shifted its focus on to integrating the companies it had already purchased.
This allowed the company to report clear financials without any possible muddying from newly acquired companies.
Despite a constrained supply chain globally, WiseTech booked a revenue leap of 18 per cent. Its earnings before interest, tax, depreciation and amortisation surged 63 per cent and its EBITDA margin leapt 11 percentage points to 41 per cent.
The company’s free cash flow was also up 149 per cent.
“If you go back to the August 2021 result, it showed the EBITDA margin improving and the stock rallied double digits at the time,” says Elise Kennedy, head of Australian technology research at
Jarden.
“It doesn’t matter what the topline does, they showed they were making profits, and it was at a time when the market was concerned about costs. To me, that was the delta that delivered versus its tech peers.
Free cash flow is hard to lie about, and it was a step change for this stock.”
Mason agrees, saying the raw, audited numbers posted in August 2021 were “high quality”.
“At that point, the lens changed on the company,” he says.
“[Until then], because of the complexity of WiseTech’s investment thesis ... and the fact they weren’t good at presenting ... and the accounts were complicated because of M&A, the company was considered higher risk and lower quality.
“August 2021 shocked a lot of people – they hadn’t done any deals, everything was organic, and the cash conversion was really good. Nowadays, they can do what they want because the doubt is now gone.”
Growth trajectory
The surprisingly strong result
catapulted WiseTech shares more than 28 per cent on the day, having at one point been up as much as 57 per cent.
It was also a turning point for the most sceptical analysts in the market.
Former Morningstar analyst Gareth James had by far the lowest price target of all those covering WiseTech in 2019, but in September 2021, he upgraded his fair value target from only $9.30 a share to $60 a share – $10 above where it was trading.
Although he had dismissed many of JCap’s claims, he wrote at the time that concerns about WiseTech’s acquisition strategy, high capitalisation of research and development costs and slow revenue growth led him to adopt a “relatively cautious” approach.
But, his opinion shifted.
“WiseTech’s fiscal 2021 result, fiscal 2022 earnings guidance and improved disclosure have alleviated many of our concerns, such that we now think our previous pessimism is unlikely to play out,” he wrote.
“Demand for WiseTech’s CargoWise software is obviously strong and management’s acquisition strategy looks likely vindicated.
“The company performed well during the pandemic, and recent customer wins, such as FedEx, the potential for new products like Neo, and the company’s global expansion strategy have increased our confidence in the long-term earnings outlook.”
Better presentations
Before the August 2021 results announcement, WiseTech made one other critical decision that helped investors and analysts warm to the company.
In March of that year, it hired former Telstra head of investor relations Ross Moffat to run its IR.
Kennedy, who was working as a technology analyst at Morgan Stanley at the time of the short attack, said WiseTech was renowned for its lengthy investor presentations, but its IR team at the time wasn’t familiar with what the market required.
“We used to count the pages of their decks,” she laughs.
“It was a matter of maturity in the way they presented. Now, their head of IR is ex-Telstra, he’s familiar with what the market needs to hear, and it’s so different. I really enjoy being able to speak to them now.”
Continued confidence
In its
most recent half-year result, WiseTech’s statutory revenue for the first six months of the 2023 financial year of $378.2 million exceeded its entire year’s revenue in 2019 ($348.3 million), while its EBITDA of $187.3 million compared to $108.1 million for the 2019 full-year.
The business has recently
stepped up its acquisition strategy once again, but this time there are a few key differences: the deals are by far the largest the company has done, the companies are SaaS plays similar to WiseTech, and they’re not considered “tuck-ins”;rather, they’re giving the company new capabilities in land side logistics in the US, which it did not have previously.
Accordingly, WiseTech has also been clear that it does not expect revenue from its newly acquired companies
Envase Technologies and
Blume Global to go backwards.
“These are recurring revenue businesses, there won’t be one-time, or services revenue coming out,” Mr White said on a recent earnings call.
Most pleasing for analysts, however, from its recent results was the signing of industry leader Kuehne + Nagel to its new customs management software, which has been in development for about five years.
There are two benchmark freight forwarders globally – DSV and Kuehne + Nagel. Historically, DSV had been an early adopter of WiseTech’s software and had become a marquee customer, while Kuehne + Nagel had developed its own software.
Kuehne + Nagel’s adoption of CargoWise for customs management,
Mason believes, could trigger a wave of follow-on deals.
Although Morningstar had been the biggest bear on the stock until James reversed his position in 2021, today the company’s new analyst Roy Van Keulen has the highest price target of all the 16 analysts who cover the stock, according to Bloomberg.
His comfort with the company, he says, is partly thanks to the additional insider knowledge he’s garnered through his wife working in the logistics sector. She was able to direct him to industry insiders with insight into WiseTech’s products.
“The thing that stands out to me about WiseTech is the productivity element to it. If you think of logistics, it’s a sector that has generally super low margins, so if you can eke out productivity improvement, that falls to the bottom line,” he says.
“If you look at CargoWise customers that have been on the platform for the last 10 years ... they’ve outperformed.”
(20min delay)