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Why WiseTech and Netwealth are overvalued

Emma Rapaport  |  12 Sep 2018Text size  Decrease  Increase  |  
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Morningstar equity analysis can help identify the stocks that are trading at more or less than their fair value estimates.

A Morningstar one-star rating indicates a high probability of undesirable returns over several years and potential capital loss.

These two stocks carry a one-star rating, and could be ripe for-profit taking if shareholders are looking to realise gains from their portfolio.

WiseTech Global Limited (ASX: WTC)

Shipping contianers

Global logistics software provider WiseTech Global had a strong showing at the 2018 financial full-year results, reporting a 44 per cent jump in revenue to $221.6 million in FY18, topping its upper guidance of 43 per cent growth. Management reported a net profit of $40.8 million, up 28 per cent from last year. WiseTech's the share price rose by almost 28 per cent.

However, Morningstar equity analyst Gareth James said he was "extremely surprised" by the market's reactions to the result and warned that the stock remains overvalued at current levels.

"The 28 per cent increase in its share price [on 22 August 2018] implies the company had significantly exceeded consensus estimates or made a particularly material announcement," he says, noting that it had done neither.

"It’s possible that the lack of free float is partly driving share-price volatility, with founder and CEO Richard White still owning 51 per cent of the company," James says.

Morningstar has increased its earnings forecasts for WiseTech to reflect its implied organic growth rate and likely future contributions from recent acquisitions. Revenue forecasts have also been increased.

However, "we struggle to justify the market price," says James.

He points to management's claim that the underlying earnings margin is 48 per cent, rather than the headline 35 per cent, when stripping out the effect of recent acquisitions.

"We’re inclined to wait for further evidence before taking this claim on face value.

"We remain disappointed by the level of disclosure by WiseTech regarding the underlying performance of the business. We don’t believe the company provides enough information on the key drivers of organic revenue growth.”

WiseTech’s share price was trading at about $21.72 at time of publication, more than 3.5-times Morningstar’s $6.20 fair value estimate.

Netwealth Group Limited (ASX: NWL)

Advice investing technology

Netwealth Group made a strong showing when it debuted on the Australian market in November last year, with its shares climbing almost 44 per cent on its first day of trading.

The financial management software provider forecast about a $20 million lift in revenue to about $80 million in 2017/18, derived mainly from fees - for account administration, management and transactions.

Despite meeting its prospectus forecast to report a full-year $29 million net profit last month, Netwealth's shares fell 8 per cent on managements warning of pricing competition between platforms. A platform is a digital tool that allows advisers to organise and manage clients’ investments.

Even following share price weakness, Morningstar’s James considers the stock to be overvalued and expects fierce industry competition to continue to restrict margin expansion.

"From a relatively low base, Netwealth continues to out-earn its market share in net flows in funds under administration, and we remain positive on the firm's ability to continue to attract flows," James says.

"[However] competitive pressures should remain. Less than half Netwealth's FUA flows in the June 2018 quarter were fee-paying, and as a proportion of total FUA, fee-paying FUA fell to 61.6 per cent in fiscal 2018 from 69.3 per cent in fiscal 2017.

"Platform revenue per average FUA fell 12 per cent in fiscal 2018 to 53.4 basis points, and we expect this to continue to contract by more than 5 per cent per year over the next five years."

To illustrate this highly competitive environment, James points to BT's decision to slash fees on its Panorama platform in July.

Netwealth has several competitors with similar offerings, including Hub 24 (ASX: HUB), Praemium (ASX: PPS), Onevue (ASX: OVH), Managed Accounts (ASX: MGP), and Powerwrap.

The vertically integrated incumbent platform providers also continue to develop their platforms, which poses a long-term competitive threat to Netwealth, James says.

James has not attributed an economic moat – or sustainable competitive advantage – to Netwealth, saying: "[the company] lacks an aligned network of financial advisers, which form a significant component of switching costs, in addition to administrative switching barriers."

Netwealth's share price was trading at about $8.29 at time of publication, 56 per cent above Morningstar’s $5.30 fair value estimate.

 

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Emma Rapaport is a reporter for Morningstar, based in Sydney.

© 2018 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782 ("ASXO"). The article is current as at date of publication.

is a reporter for Morningstar.com.au

© 2019 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782. The article is current as at date of publication.

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