WiseTech drops $1.2 billion despite short sell rebuttal

Written on the 21 October 2019 by Matt Ogg

WiseTech drops $1.2 billion despite short sell rebuttal

A detailed response to a short selling attack has done little to cushion a share price freefall for logistics software unicorn WiseTech (ASX: WTC), which lost another $1.18 billion in its market value this morning. 

The bloodletting adds to more than $1 billion that was lost on Thursday following criticisms from China-based J Capital Research (JCAP).

The hedge fund alleged WiseTech inflated its profits by up to $116 million in three years with acquisition-driven growth and overstated European revenues.

WiseTech entered a trading halt on Thursday to prepare its defence, and the next day saw the resignation of non-executive director Christine Holman who also chaired the audit and risk management committee.

After the market closed on Friday, WiseTech issued its response to "misinformation in the market". 

"We are very concerned that the allegations in the document may mislead and manipulate the market to the detriment of WiseTech's business and its shareholders, large and small," said WiseTech founder and CEO Richard White.

"Our financials, our revenue, our profit, our growth rates and our product have all been verified comprehensively and form part of the external independent audits conducted annually."

But WiseTech's explanations were not enough to put investors at ease.

After trading reopened this morning shares fell by a further 12.3 per cent to $26.30 per share, wiping out another $1.18 billion before another trading halt was called. 

This means the group's market capitalisation has plunged by $2.26 billion since the report came out, but the market has clearly been suspicious of WiseTech's valuation for some time. Since its high of $38.80 per share in September, WiseTech has lost almost $4 billion in value.

Despite these falls, WiseTech still has a massive price to earnings ratio of 147.9.

JCAP estimated the logistic tech company's underlying organic growth rate was 10 per cent and not the 25 per cent it claims, allegedly implying "an estimated 80% of the company's top-line growth is from purchased revenue".

"We have obtained financial fillings of European subsidiaries that showed declines in revenue and that support our estimates, and we have spoken with former employees who reported much lower organic growth," JCAP said.

"WiseTech is able to shield subsidiaries from audit scrutiny through an Australian peculiarity called the "deed of cross guarantee." Simply put, the auditors aren't looking at the numbers closely enough.

"WiseTech's Australian subsidiaries, through which much of the international revenue has been channeled, have been shielded from audit scrutiny."

 

The hedge fund highlighted WiseTech had spent $400 million buying 34 companies since its IPO in April 2016.

"We do not think the acquisitions have been great logistics software companies that can gain from being part of the WTC network. Instead, WiseTech's acquisition spree looks like a frantic effort to maintain the narrative that this is a fast-growing technology business," JCAP said.

WiseTech's response

WTC's troubles have arisen in an environment where several ASX-listed companies have been the victims of short selling attacks launched from abroad, most notably the pitch against Rural Funds from Bonitas Research.

"We support investigations by Australian regulators of attempts by overseas domiciled short sellers to target ASX companies and in prosecuting unconscionable conduct," White said.

"We are and will remain focused on correcting material misleading information and protecting our shareholders from such conduct."

The company disputes JCAP's estimate that its revenue growth in FY19 was just 10 per cent.

"WTC organic revenue growth in FY19 was 33%," WiseTech said.

"The JCAP commentary appears to suggest the information on organic growth and acquisition revenues is unclear, in fact WTC disclosures provide the split of revenue between organic and acquired for FY17 to FY19 and articulate the drivers for organic revenue growth which support our indicated average organic growth range of 20%-30%pa."

The group emphasised 99 per cent of its CargoWise revenues were recurring and invoiced monthly.

"Over the last three years our businesses have delivered operating cashflow of $271m, well above our EBITDA of $240m.

With regards to the allegation of overstating revenues in Europe, WiseTech described JCAP's analysis as flawed, understating revenue in the old continent because WiseTech actually includes major global customers like DHL, DSV and others in its European revenues because they are based there; not just the revenue of its subsidiaries.

In addition, WiseTech notes JCAP's analysis excluded six of the 11 Europe, Middle East and Africa (EMEA) acquisitions completed up to the end of FY18.

WiseTech also claims the 'deed of cross guarantee' argument from JCAP is "irrelevant", and that there was nothing unusual about its pre-IPO accounting or its audit partner movement.

"It should be noted that all WiseTech subsidiaries are required to maintain detailed accounting transaction records to support Group audit procedures and local statutory audits, and those audits occur with their own separate materiality thresholds at the subsidiary level," the company said.

In light of these arguments - with greater detail in the release - WiseTech "rejects entirely the unfounded allegations of financial impropriety and irregularity contained in the document".

"We acknowledge the right to differing opinions, but we are deeply concerned about the extensive value destruction that can be wrought from shortseller reports that potentially damage our shareholders large and small and the integrity of investment markets," says White.

"All shareholders should be aware that unconscionable attempts to manipulate the market exist and may continue. We thank our shareholders for their support and patience while we correct these erroneous reports.

"We would ask the relevant regulators and government, not just for ourselves but for the many listed Australian corporations regularly subjected to similar attacks, to consider the complex issues raised and damage caused by reports of this type issued by a US or overseas short seller."

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Author: Matt Ogg

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