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WiseTech Poised To Gain Share In Growth Market

Australia | Jul 04 2016

This story features WISETECH GLOBAL LIMITED. For more info SHARE ANALYSIS: WTC

-Strong demand growth
-Key contract with DHL
-Opportunity to take share


By Eva Brocklehurst

Software provider to the logistics industry, Wisetech Global ((WTC)), has sparked attention, with several brokers recently initiating coverage of the stock. The company has established a profitable foothold in freight forwarding and compliance.

The addressable market is significant. In 2015, software forecaster Gartner estimated a market in supply chain execution software of US$3.5bn, with 10.4% compound growth to US$5.2bn by 2019, given increased global trade, supply chain complexity and cost pressures.

Macquarie notes the software-as-a-service (SaaS) model delivers high recurring income, customer retention and margin growth from new customer acquisitions and takes up coverage with an Outperform rating and $4.70 target.

The company's main product is CargoWise One, which enables global logistics businesses to manage, track and trace freight and control customs, compliance and warehousing. This is a secure online application suite which improves efficiency and reduces costs and risks involved in the movement and storage of goods.

As supply chains become more complex, regulations specific to a country become more intricate and there is increased recognition of the benefit of a complete solution. Macquarie attributes the company's success, in part, to a strong network. The CargoWise One platform is mission-critical software, underpinned by extremely low annual attrition rates.

Organic growth has been complemented by acquisitions which the broker expects will continue, given a fragmented market. The company's cash balance of $90m is expected to be deployed over the next 12-18 months.

Macquarie acknowledges the premium valuation demands strong medium-term earnings growth, needed to offset the normalisation of expenses and R&D capitalisation. Yet, while the valuation at current prices may not appear compelling, the broker believes the long-term market penetration opportunity is substantial.

Over the past 20 years the company has made several acquisitions of small software suppliers to penetrate new markets and acquire customers.The show piece in its armoury is the exclusive global contract with Deutsche Post/DHL, signed last December. Morgan Stanley estimates this contract will contribute $15.2m annually in revenue and should improve confidence in WiseTech's ability to establish itself as a vertical leader.

Macquarie concurs leadership in freight forwarding has been underscored by DHL choosing WiseTech for its air and sea freight forward business but suggests, given industry feedback, that CargoWise in some instances lacks necessary product depth to offer a full supply chain solution. The challenge, therefore, is to drive penetration of non-freight forwarding modules to the existing client base, the broker contends.

Credit Suisse notes the genesis of the deal with DHL Global Forwarding was the failure of the company's internal IT project, which resulted in a EUR 345m write-down when it was finally abandoned in favour of a commercially proven enterprise software solution.

This failure of an internal solution demonstrates both the cost and complexity of proprietary software in an increasingly interconnected and cloud-based world and the broker suggests more major logistics companies will follow this lead.

This is one of the risk areas Macquarie identifies for WiseTech Global. Competitors are targeting the online logistics segment and they include large multinational competitors that typically offer adjacent enterprise-type solutions. Furthermore, while it remains attractive economically to acquire smaller, sub-scale regional operations to migrate customers, offshore M&A is inherently risky.

Macquarie assumes total R&D investment growth will be sustained at 9% over the medium term and the earnings profile estimate is supported by $120m of estimated acquisition investment across FY18-21. The broker's estimate of 33% revenue growth in FY17 is largely driven by a combination of the commencement of contracted global trading agreements and the end of temporary pricing arrangements for certain customers.

Morgan Stanley initiates with an Overweight rating and $5.00 target, believing the stock offers a structural growth story that is early in its life cycle, as global logistics companies chose to move to the cloud and away from in-house software. The broker retains a strong conviction regarding the industry's growth path, as most forwarders are still using in-house solutions. Moreover, the economics of shifting to the cloud are compelling.

Credit Suisse initiates with a Neutral rating and $4.32 target, believing WiseTech will benefit from the trend towards solutions in the cloud. The broker also suspects there is opportunity for an integrated provider such as WiseTech to take market share as the end user dispenses with legacy products.

Yet, Credit Suisse is also of the opinion that strong execution is required to justify the premium to global peers. Structurally higher margins and attractive unit economics should be supportive but the global roll-out strategy needs to be maintained to uphold the current premium.

These three brokers contribute to a consensus target of $4.67 on FNArena's database, suggesting 1.2% upside to the last share price, with two Buy ratings and one Hold.

WiseTech was founded in 1994 and has more than 6,000 customers, ranging from small and mid sized regional or domestic enterprises to large multinationals. The company's Sydney base has expanded to include offices across Australia, New Zealand, China, Singapore, South Africa, the UK and the US.

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