ASX listed share added to our best ideas
The November edition of our Global Best Ideas list includes a new pick from our analysts.
Mentioned: WiseTech Global Ltd (WTC)
Finding quality stocks trading at a cheap price can be a challenging and time-consuming task. You not only need to identify whether a company has a tangible edge over its peers. You also need to assess whether a stock is over- or under-valued.
The Global Best Ideas list is compiled by Morningstar’s equity analysts every month. To earn a spot on the list, these stocks have high analyst conviction in their future prospects and are trading at a price significantly below what our analysts calculate them to be worth.
Buying stocks when they are undervalued gives investor’s a higher margin of safety, therefore reducing the risk of an uncertain future.
Additionally, analysts consider the stock’s moat rating. This rating is an indication of the analyst’s expectations for the company to maintain a sustainable competitive advantage. A wide moat rating is awarded to companies that are expected to maintain and grow their earnings for at least the next 20 years, a narrow moat for the next 10 years.
Brian Han, Director of Equity Research, says of the list “These Best Ideas are sourced from all main sectors of the market, to provide a diversity of names across the spectrum. The last thing investors want is a Best Ideas list chock-full of cheap mining stocks when commodity prices tank, or a litany of oversold retail stocks when consumer sentiment slumps.”
The November monthly list has 79 global shares and 14 ASX listed companies and has seen the addition of domestic share Wisetech (ASX: WTC).
WiseTech provides logistics companies the technology to digitise. WiseTech’s core product suite, CargoWise, provides the best-in-class software solution for international freight-forwarding by air and ocean. We see logistics companies that use the CargoWise international freight-forwarding solution as significantly outperforming peers due to the efficiency and productivity improvements the platform provides. We therefore expect this solution to become the industry default, either through increased customer adoption or through WiseTech’s customers taking market share.
Morningstar analyst Roy Van Keulen believes Wisetech is well-managed, high-quality company with a large and highly winnable market opportunity. He has assigned Wisetech a narrow moat rating based on switching costs and network effects in its core CargoWise product suite.
Switching costs refers to the high degree of expense and effort needed for a customer to switch to a rival provider. Network effect comes into play when a product becomes more valuable as it gains more users. Both factors contribute to a sustainable competitive advantage or moat.
CargoWise’s switching costs are evidenced by its industry-leading customer retention rates of over 99% per year during the past decade, despite the company implementing material prices increases for many customers in recent years. WiseTech’s customers use the CargoWise product for the efficient allocation of resources to move goods, especially for international freight-forwarding by air and ocean.
The industry landscape of logistics services providers is highly fragmented, both within and between its core components of air and ocean, road and rail, and warehousing. The resulting many potential touchpoints mean that implementation of supply chain execution software is inherently highly complex.
As a result, implementation of the software requires multiyear rollout projects as processes are mapped, technologies integrated, and people trained. Given the high upfront capital expenditure and the mission-critical nature of the product, once implemented, CargoWise customers have been reluctant to switch providers.
Van Keulen also sees evidence for network effects in the CargoWise product suite. Freight-forwarders select and co-ordinate the operators of physical assets, such as ships, airplanes, trains, trucks, and warehouses, to move goods. When asset operators are integrated with CargoWise, freight-forwarders can maintain visibility as goods move along the supply chain without freight-forwarders having to manually track and trace these movements. This results in significant labour cost savings for freight-forwarders.
Wisetech is currently trading at a 37% discount to Van Keulen’s fair value estimate of $95. He assumes that revenue grows at a compounded annual growth rate (“CAGR”) of 21% over the next decade, driven primarily by organic revenue growth in WiseTech’s CargoWise product suite, which he expects to grow at a CAGR of 24% over the next decade.
Van Keulen forecasts an increase in group earnings before interest and taxes (“EBIT”) margin to 49% by fiscal 2033 from 37% in fiscal 2023 due to CargoWise’s network effects reducing customer acquisition costs. As a product-led company, this means that we expect both WiseTech’s sales and marketing and research and development spending to come down as a percentage of revenue.
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