WiseTech Global’s strong debut on the Australian Securities Exchange (ASX) this week buoyed technology bulls and potentially paved the way for other tech companies to list in a tough float market.
WiseTech’s market capitalisation hit $1.13 billion when its $3.35 issued shares rallied to $3.89 within days of listing. The logistics software provider is FY16’s third-largest listing, after CYBG Plc and Link Administration Holdings.
Large tech listings in Australia have been rare since 2010, despite growing hype about the sector and the strong collective performance of US tech stocks. Most tech listings on the ASX have been for micro-cap companies and many have chosen so-called “backdoor listings” and vended their assets in listed shell companies, in preference to an IPO.
MYOB stands out among larger recent tech IPOs
WiseTech, Link and accounting software provider MYOB Group are among the few tech listings large enough for long-term portfolio investors.
Link has had a good start after raising $943 million in an IPO and listing in October 2015. Its $6.37 issued shares peaked at $7.99 and trade at $7.66. Link’s maiden result as a listed company impressed, with revenue tracking slightly ahead of first-half guidance, and full-year prospectus forecasts maintained. But it looks fully valued for now.
MYOB Group has not fared as well after raising $739 million through an IPO and listing in May 2015. Its $3.65 issued shares, considered a touch expensive at listing, have fallen to $3.25 after almost touching $4. MYOB’s fiscal 2015 result slightly bettered prospectus forecasts amid good momentum in its cloud-based services.
MYOB, a high-quality company, looks slightly undervalued after recent price falls. The market has mixed views: two broking firms that cover it have a buy, three have a hold and one has a sell. A median price target of $3.29, based on consensus analyst estimates, suggests MYOB is fully valued. But I believe it can do better than the market expects as demand for cloud-based accounting software grows.
Accounting software is a fascinating industry; something has to give with four big players in Xero, MYOB Group, Reckon (nominated as a takeover target in the Switzer Super Report) and Intuit Group, maker of Quicken software. I expect Xero and MYOB to dominate the market over time, but the others, particularly Reckon, will not go without a fight.
Chart 1: MYOB Group
Source: Yahoo!7 Finance
WiseTech’s attractions include a strong global footprint and deep integration in the logistics industry. Transport operators use its CargoWise One technology to move and store goods – a growth industry if ever there was one.
WiseTech forecasts its pro forma after-tax net profit will grow from an expected $14.3 million in FY16 to $26.1 million in FY17. That puts it on a forecast FY17 Price Earning (PE) multiple of about 43 times – too rich for my liking, even though WiseTech has good long-term prospects. As with most floats, I’d prefer to wait until it has more history as a listed entity.
This brief analysis of tech IPO shows how hard it is to find tech stocks of sufficient size and quality on ASX for portfolio investors, and how the scarcity of large tech stocks on the ASX leads to higher valuations compared with similar companies offshore.
Watch the portals
Of course, much depends on one’s definition of “tech” these days. A broader definition brings billion-dollar star stocks such as Seek, REA Group and Carsales.com into play. It wasn’t so long ago that the “internet portals” were considered emerging tech stocks.
One of my best strategies over the years was to buy the internet portals during market sell offs and corrections. It was obvious Seek (SEK), REA (REA), CarSales.com (CRZ), Webjet (WEB) and Wofit.com Holdings (WTF) (another stock identified in the Switzer Super Report Takeover Portfolio that was acquired) had good growth prospects. But nose-bleeding valuations made them hard to buy.
Investors can mistakenly overlook REA, Seek and Carsales.com, believing they have had their big gains and now as blue chips in their own right have lower growth prospects. They still have terrific long-term outlooks, particularly offshore.
Seek has had a rare negative total return (including dividends) over 12 months, REA is up 13% (low by its standards) and Carsales.com has delivered 23%. Each looks fully valued at the current price, with REA offering slightly better value than its peers.
Another portal, Trade Me Group, looks more interesting from a valuation perspective. The New Zealand provider of online auction and marketplace services demerged from Fairfax Media over 2011-12. It has disappointed over the past three years with an annualised return of 2%, amid losses in online property advertising and market concerns about its required capital expenditure.
Trade Me’s turnaround potential is reflected in its rally from $2.70 in July 2015 to $3.87. The market has a habit of underestimating how much capital is required to fix up businesses that demerge from larger companies. Non-core businesses often struggle to compete for capital within the parent company and take a few years to repair as standalone companies. The bulk of Trade Me’s investment program is over, meaning it can get on with the job of growing market share and earnings.
The original Trade Me business in online auction is going okay and the online classified advertising business in jobs and property has excellent growth prospects. The market seems to have lost some interest in Trade Me, despite it trading on a forecast FY17 PE multiple of 16 times, based on the consensus of a small number of analyst forecasts. By internet portal standards, the PE is modest for a company that dominates its market.
Chart 2: Trade Me Group
Source Yahoo!7 Finance. Based on Australian prices
Tech companies with an eye on Asia
This column has identified several ASX-listed technology companies benefiting from growth in Asia. iProperty Group (taken over by REA Group) and iCars Asia (ICQ) were both nominated in the Switzer Takeover Portfolio at different times. The online advertising companies, from the Catcha Media stable, are targeting huge South East Asian markets.
Freelancer (FLN) is another I have favoured for its offshore exposure. The micro-jobs site is essentially a play on wage arbitrage between Western and Eastern labour markets: companies in developed markets outsourcing work to cheap labour in emerging markets via Freelancer’s platform.
Freelancer has more risk than other technology stocks mentioned in this column and suits experienced investors comfortable with speculation. It is yet to make a profit, is reinvesting surplus cash flow in the business, and has been an occasionally volatile stock since its 2013 listing at 50 cents a share.
Nevertheless, the micro-job market has excellent long-term prospects and rapidly rising internet penetration in developing markets is connecting Western companies to cheaper labour. It’s hard to fault Freelancer’s execution or acquisition strategy so far.
Freelancer shares spiked this week after investment bank UBS initiated coverage with a buy recommendation and $1.85 price target. If all goes to plan, Freelancer will be worth a lot more within 3 to 5 years, but is close to being fully valued for now.
Vista Group International (VGL) is another promising Asia-focused tech stock. The New Zealand-based company, dual-listed on the ASX, provides cinema-management software, film-distribution software and customer-analytics software in the global film industry.
Vista delivered 39% growth in revenue to NZ$65.4 million for FY15 and grew underlying earnings (EBITDA) by 60% to NZ$15.1 million. Both results exceeded prospectus forecasts.
Vista last month announced the sale of its Chinese subsidiary into a new venture owned by Vista and Weying Technology. Weying’s online ticking App is integrated into WeChat, the giant Chinese App that more than 600 million people use. About three-quarters of movie tickets in China are sold online through Apps, and Weying is thought to have a 15% share in this market.
The deal should give Vista a stronger position in the soaring Chinese cinema market, which is expected to be the world’s largest box-office revenue earner by 2017. The boom in Asian middle-class consumption, covered extensively in this column, is driving stronger demand for Western-style entertainment, such as action movies. Chinese cinemas are superbly placed to benefit.
Macquarie Wealth Management estimates the deal is worth about $1 a share to Vista, which is not included in 12-month price target of A$5.39 (NZ$6) – a reasonable safety margin to Vista’s A$4.85 share price.
Vista is due for share-price consolidation after strong price gains since its $83-million IPO in August 2014 at $2.15 a share. But the combination of software, entertainment and China focus makes Vista among the market’s more interesting companies for long-term investors, who understand the risks of investing in thinly traded small caps.
Chart 3: Vista Group International
Source: Yahoo!7 Finance
– Tony Featherstone is a former managing editor of BRW and Shares magazines. This column does not imply any stock recommendations or offer financial advice. Readers should do further research of their own or talk to their adviser before acting on themes in this article. All prices and analysis at 13 April 2016.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.
