Bucephalus Research slams Wisetech for "buying customers"

17 December 2019, Written by Matt Ogg

Bucephalus Research slams Wisetech for "buying customers"

Bucephalus Research managing partner Robert Medd (pictured) describes WiseTech as a "deal machine", alleging it has bended accepted accounting practices to inflate profits.

After previously alleging agricultural property group Rural Funds (ASX: RFF) was a "Ponzi scheme that could collapse at any time", a Hong Kong-based researcher is now taking aim at another besieged Australian company.

Led by Robert Medd, Bucephalus Research runs a paid subscription service under the motto 'exposing creative accounting'. As far as ASX-listed stocks are concerned it has recently followed in the shadows of the shorts. 

Although Bucephalus does not sell shares or derivatives, it followed Bonitas Research's criticisms of RFF and is now following short seller J Capital's lead in slamming logistics technology company WiseTech (ASX: WTC).

Founded by Richard White, Wisetech have fallen from spectacular heights since J Capital alleged it understated organic growth and shielded subsidiaries from audit scrutiny due to the Australian 'deed of cross guarantee' instrument.

WTC shares rebounded somewhat after White described J Capital's claims as "self-serving and misleading" on 23 October, but the effect didn't last long and shares have fallen a further 17 per cent since then to $23.79 each.

This is substantially lower than Wisetech's 52-week high of $38.80 achieved in September, but the company is still trading at a large P/E ratio of 108 implying investors still see strong earnings growth potential. 

In a YouTube video published yesterday, Medd was not so optimistic about WiseTech's prospects.

"We think WiseTech is simply bending accepted accounting practice to report profits when in reality they lose money," he says.

"WiseTech compares itself to Descartes, to Oracle, SAP, Xero, Cochlear and Altium, all of whom are highly valued, but apart from that we can't see that they have anything in common with WiseTech.

"We think it's far more sensible to look at WiseTech on its own merits, of which we see very few. When we look at growth for example we see that core revenue growth is falling - it was 38 per cent in '18, 33 per cent in '19 and the company itself forecasts it to be earning 24 per cent in 2020."

He describes WiseTech as a "deal machine" having spent $400 million on acquisitions since listing in 2016, paying a "high multiple of sales for businesses that have revenue but little if any profit or hard assets".

"[It] seems to us they're effectively paying up to buy customer relationships that they hope can be brought across the core business.

"These deals allow WiseTech to put what would otherwise be a cost onto their balance sheet and call it an asset.

"This is how they're able to grow despite spending so little marketing. However, correct for these M&A-driven customer acquisition costs and they spend much more and achieve far less than their peers - they inflate profits even further by capitalising close to half of their software development costs.

"This contrasts rather badly with their closest competitor Descartes, who like most software companies, expenses all their development costs."

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Author: Matt Ogg

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