WiseTech was hit by a series of reports from J Capital and Bucephalus, short-sellers based outside of the country, through the closing months of 2019.
Both J Capital and Bucephalus made three criticisms: that WiseTech is using rapid acquisitions to give the impression of strong organic revenue growth; that capitalisation of software development costs is boosting profits; and that the company’s financial statements are misleading.
Since the reports were published, WiseTech’s share price has fallen 37 per cent. And Morningstar thinks it could fluctuate further with the announcement of the company’s interim financial result on 19 February.
“Obviously, an earnings downgrade would not be welcomed by the market, but the share price impact would be significantly exacerbated by bruising of management’s credibility following its recent staunch defence of their actions,” the research firm wrote in a report.
While both J Capital and Bucephalus were upfront about the fact that they stood to gain from making WiseTech look bad, Morningstar is also leery.
“We’ve long held the view that WiseTech has poor disclosure regarding its key revenue and cost drivers, and the difference between reported profit and profit including capitalised research and development costs is also a concern,” the report reads.
“For example, in fiscal 2019, reported NPAT was $54 million, but just $29 million if capitalised research and development costs are included.”
Morningstar maintains their fair price of $8.10 for the company’s stock – significantly less than the current market price of $24.87.
However, the news is not all bad. Morningstar notes that WiseTech’s business is protected by a narrow moat based on customer switching costs, which has given them a 99 per cent customer retention rate over the past four years. And WiseTech has held firm on its 2020 earnings guidance, pricing in revenue of $440 million – a 30 per cent increase on the prior year.
And if that materialises, then CEO Richard White might still be able to assuage some of the concerns that have dogged the company since J Cap’s shock attack.
