The Australian Federal Police is investigating whether WiseTech’s (ASX: WTC) executive chairman Richard White exploited a woman’s immigration status, according to media reports. Shares fell more than 15%.

Why it matters: The investigation relates to allegations made by a former WiseTech employee, Caroline Heidemann, who alleged last year that White had made her financial assistance and immigration status contingent upon sexual relations.

  • Specifically, the investigation by the AFP is about whether White engaged in visa fraud and human trafficking. Penalties for such potential crimes can be severe, especially for the latter category, and include potential jail time, meaning White could be removed from the company.
  • However, based on the reported facts, we think it is more likely that the investigation will lean toward potential visa fraud from a possible illegitimate sponsoring of Heidemann’s visa. We think this is more likely to incur penalties than jail time.

The bottom line: We leave our fair value estimate for the wide-moat company unchanged at AUD 138 per share, as we don’t expect the investigation to affect White’s continued employment. Shares screen as materially undervalued, primarily because of fears that artificial intelligence will disrupt the business.

  • We believe it would be appropriate to cut our fair value estimate if White is forced out, as we believe White remains instrumental to the company’s continued success. We estimate a 15%-20% cut in our fair value would be appropriate from lower growth and margins.
  • However, we currently do not believe the likelihood of this scenario is high enough to change our valuation and share screen as cheap regardless.

Big picture: WiseTech’s CargoWise has no competitors of note and has a long runway of problems to solve for customers—where it benefits from AI lowering software development costs—underpinning sustained, profitable growth.

WiseTech’s Chairman saga continues, but does not change fair value

WiseTech’s long-term strategy centers on becoming the operating system for global trade and logistics as the industry digitizes.

We expect the logistics industry to digitize rapidly over the next decade. The logistics industry currently operates with a relatively low level of digitization. However, the market for logistics services naturally selects for the lowest-cost providers and we see digitization as a key driver of cost-savings. We therefore see the process of digitization as inevitable, either through companies adopting digitization to remain competitive or through digital leaders taking market share from the digital laggards.

WiseTech provides logistics companies the technology to digitize. WiseTech’s core product suite, CargoWise, provides the best-in-class software solution for international freight-forwarding by air and ocean, and customs and compliance. We see logistics companies that use the CargoWise international freight-forwarding solution significantly outperforming their 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.

We expect WiseTech to leverage its already dominant position in international freight-forwarding to move into downstream adjacencies, which consist of, in order of functional proximity, road and rail and warehousing. Additionally, with the acquisition of e2open, we also expect WiseTech to move into upstream adjacencies, as it starts servicing beneficial cargo owners with their logistics procurement processes.

Bulls say

  • CargoWise’s international freight-forwarding solution is best-in-class and we expect this solution to become the industry-default.
  • WiseTech is well placed to leverage CargoWise’s market position in international freight-forwarding into adjacent services such as customs and compliance, rail and road, and warehousing.
  • The logistics industry currently operates with a relatively low level of digitization, but we see the process of digitization as largely inevitable.

Bears say

  • The logistics industry is still in the early stages of digitizing, meaning there is high uncertainty as to how large the market opportunity will be for WiseTech’s current and future products.
  • Following the resignation of founder White from the CEO role and his transition to the board as executive chairman, it is unclear whether the company will have the same level of executive leadership.
  • WiseTech’s hasn’t yet incorporated all of its acquisitions into the CargoWise product suite, and the return on those investments could be dilutive if they lack strategic attention.