Company Reports

Computershare services more than 25,000 firms globally. Alongside its register maintenance services, the firm leverages its records management skills to service adjacent areas like corporate actions or annual general meetings. Acquisitions are pursued to bolster growth, such as the acquisition of Wells Fargo’s corporate trust arm in 2021 and Equatex, an employee share plan provider, in 2018. Its product variety supports cross-selling. Competition is fragmented, and peers struggle to compete with Computershare’s breadth of products, long-dated contracts, high retention, integration experience, and capability in servicing an increasingly transnational securities industry.

Computershare’s fiscal 2024 underlying results were largely as expected, with core businesses performing a little better than expected. Underlying EBIT of USD 1.15 billion met our forecasts, with stronger operating income (excluding margin income) offset by slightly lower margin income than anticipated. Core segments such as issuer services, employee share plans, and communication services delivered better-than-expected volumes, leading us to marginally increase our fair value estimate to AUD 26.50 from AUD 26.00 per share. This adjustment reflects stronger revenue growth in Computershare’s core businesses, which we expect can be maintained. We make minimal changes to our medium-term margin income projections.

Computershare services more than 25,000 firms globally. Alongside its register maintenance services, the firm leverages its records management skills to service adjacent areas like corporate actions or annual general meetings. Acquisitions are pursued to bolster growth, such as the acquisition of Wells Fargo’s corporate trust arm in 2021 and Equatex, an employee share plan provider, in 2018. Its product variety supports cross-selling. Competition is fragmented, and peers struggle to compete with Computershare’s breadth of products, long-dated contracts, high retention, integration experience, and capability in servicing an increasingly transnational securities industry.

We marginally lift our fair value estimate for Computershare to AUD 26.00 per share from AUD 25.50, reflecting the time value of money. Shares appear fairly valued at current prices. We expect the yield on client balances to peak in fiscal 2024 and gradually decline after that. Current futures curves suggest a relatively slow decline in global interest rates in fiscal 2025 due to persistent inflationary pressures but a more substantial drop in fiscal 2026 and beyond. We project margin income yields to decrease to around 1.66% of average client cash balances by fiscal 2028 from 2.84% in fiscal 2024. This is still higher than the 0.56% seen in fiscal 2022, partly due to the firm's efforts to lock in a portion of margin income at elevated rates.

Wide-moat Computershare's first-half fiscal 2024 underlying earnings per share grew 23% on the previous corresponding period to USD 54.8 cents, broadly in line with our expectations. The key growth driver is higher-margin income on client-owned cash balances. There were divisional variances, with stronger-than-expected performance in most business divisions apart from issuer services, where cost growth outstripped revenue growth, excluding margin income. We lift our fair value estimate to AUD 25.50 per share from AUD 25 with the time value of money and consider the shares fairly valued.

Computershare services more than 25,000 firms globally. Alongside its register maintenance services, the firm leverages its records management skills to service adjacent areas like corporate actions or annual general meetings. Acquisitions are pursued to bolster growth, such as the acquisition of Wells Fargo’s corporate trust arm in 2021 and Equatex, an employee share plan provider, in 2018. Its product variety supports cross-selling. Competition is fragmented, and peers struggle to compete with Computershare’s breadth of products, long-dated contracts, high retention, integration experience, and capability in servicing an increasingly transnational securities industry.

The sale of wide-moat Computershare's noncore U.S. mortgage servicing business, or CLS U.S., is a positive development. Mortgage servicing is the only unit within Computershare that consistently incurs losses at the EBIT level, excluding margin income. The sale will release capital for higher-returning investments, enabling management to strengthen the moat of its core businesses: share registry, employee share plans, and corporate trust. CLS U.S. will be sold to Rithm Capital, an asset manager focused on real estate and financial services sectors. We expect the sale will be completed by management's fourth quarter of fiscal 2024 estimate.

Computershare services more than 25,000 firms globally. Alongside its register maintenance services, the firm leverages its records management skills to service adjacent areas like corporate actions or annual general meetings. Acquisitions are pursued to bolster growth, such as the acquisition of Wells Fargo’s corporate trust arm in 2021 and Equatex, an employee share plan provider in 2018. Its product variety supports cross-selling. Competition is fragmented, and peers struggle to compete with Computershare’s breadth of products, long-dated contracts, high retention, integration experience and capability in servicing an increasingly transnational securities industry.

We raise our Computershare fair value estimate by 4% to AUD 23.50, along with transfer of coverage to a new analyst, reflecting a decline in the AUD/USD exchange rate. We also reiterate our narrow moat, Medium uncertainty, and Standard capital allocation ratings. Shares screen as close to fairly valued. Computershare is a leading provider of registry services and also provides mortgage servicing, corporate trust and other financial services. Partly through acquisitions, Computershare has become the largest provider of registry and related services in the world. The narrow moat rests on switching costs and cost advantage.

Computershare suffered from falling interest rates and a mature core registry business following the global financial crisis, with underlying EPS reasonably flat between fiscal 2009 and 2020. However, we expect cost-cutting, and an expansion of the mortgage servicing business to drive an underlying EPS CAGR of around 8% over the next decade. The core registry and related services businesses, which constitute around 60% of group EBITDA, are reasonably mature and we expect flat revenue growth in real terms over the next decade as rising interest rates and margin income offsets industry contraction as shareholders are consolidated under nominee accounts. In contrast, we expect mortgage services growth to drive a revenue CAGR of around 5% for the business services division, underpinning a group revenue CAGR of 3%.

Computershare suffered from falling interest rates and a mature core registry business following the global financial crisis, with underlying EPS reasonably flat between fiscal 2009 and 2020. However, we expect cost-cutting, and an expansion of the mortgage servicing business to drive an underlying EPS CAGR of around 8% over the next decade. The core registry and related services businesses, which constitute around 60% of group EBITDA, are reasonably mature and we expect flat revenue growth in real terms over the next decade as rising interest rates and margin income offsets industry contraction as shareholders are consolidated under nominee accounts. In contrast, we expect mortgage services growth to drive a revenue CAGR of around 5% for the business services division, underpinning a group revenue CAGR of 3%.

Narrow-moat Computershare’s resilient first-half financial result was broadly in line with our expectations and we've maintained our earnings forecasts and AUD 17.50 fair value estimate. At the current market price of AUD 14.55 we continue to believe Computershare is undervalued.

Computershare suffered from falling interest rates and a mature core registry business following the global financial crisis, with underlying EPS reasonably flat between fiscal 2009 and 2020. However, we expect cost-cutting, and an expansion of the mortgage servicing business to drive an underlying EPS CAGR of around 9% over the next decade. The core registry and related services businesses, which constitute around 60% of group EBITDA, are reasonably mature and we expect flat revenue growth in real terms over the next decade as rising interest rates and margin income offsets industry contraction as shareholders are consolidated under nominee accounts. In contrast, we expect mortgage services growth to drive a revenue CAGR of around 5% for the business services division, underpinning a group revenue CAGR of 3%.

Like many stocks, narrow-moat-rated Computershare had a strong share price rally from its low last March, rising 80% to its peak in December. That said, the shares still fell 13% over the calendar year and underperformed the 2% fall in the S&P/ASX 200 Index. We attribute the big share price swings in 2020 to the perceived negative effect of the coronavirus pandemic on earnings and the positive effect of near-zero percent interest rates on asset values.

Computershare suffered from falling interest rates and a mature core registry business following the global financial crisis, with underlying EPS reasonably flat between fiscal 2009 and 2020. However, we expect cost-cutting, and an expansion of the mortgage servicing business to drive an underlying EPS CAGR of around 9% over the next decade. The core registry and related services businesses, which constitute around 60% of group EBITDA, are reasonably mature and we expect flat revenue growth in real terms over the next decade as rising interest rates and margin income offsets industry contraction as shareholders are consolidated under nominee accounts. In contrast, we expect mortgage services growth to drive a revenue CAGR of around 5% for the business services division, underpinning a group revenue CAGR of 3%.

Narrow-moat-rated Computershare was significantly impacted by falling interest rates in fiscal 2020, which was the main cause of its 20% fall in underlying EPS. We estimate the company generates around a third of its earnings from the interest it receives on client-owned cash balances, which means earnings are highly sensitive to interest rate movements. The company was already being impacted by falling interest rates in the first half of fiscal 2020, however, the coronavirus pandemic and associated central bank interest rate cuts created additional earnings weakness in the second half.

We have maintained our fair value estimate for narrow-moat-rated Computershare at AUD 17.00 per share despite the second management earnings guidance downgrade in less than a month. The main reason for the downgrade is the COVID-19-related global economic downturn and associated reductions in central bank interest rates in the United States, Canada, and the United Kingdom. Computershare generated 36% of group EBITDA from interest on client-owned cash balances in fiscal 2019 but the latest interest rate cuts means we now expect margin income to fall to USD 100 million in fiscal 2021 from USD 247 million in fiscal 2019.

We have cut out fair value estimate for Computershare by 12% to AUD 17.00 per share following management’s earnings guidance downgrade and reductions in our earnings forecasts. However, at the current market price of AUD 11.75 we continue to believe the shares are undervalued. The current share price implies a fiscal 2021 price/earnings ratio of 13, versus 19 at our fair value.

We have maintained our earnings forecasts and AUD 19.40 fair value estimate for narrow-moat-rated Computershare despite its weak first-half result. Importantly, management maintained fiscal 2020 earnings guidance, implying a 5% fall in management EPS, which is broadly in line with our forecasts. The share price has performed well recently, rising 17% over the past six months to AUD 17.63, but we still believe the stock is undervalued.

Narrow-moat-rated Computershare has risen by 21% since its fiscal 2019 financial result on Aug. 14, 2019, significantly narrowing the discount to our unchanged AUD 19.40 fair value estimate but remains undervalued at the current market price AUD 17.41 per share. Management has announced little since the fiscal 2019 result, other than to reiterate fiscal 2020 guidance of a decline in "management EPS" of around 5% in constant currency terms. This is broadly in line with our forecast for a 2% decline, which assumes low-single-digit EBIT growth, offset by higher finance and taxation costs. We expect recent share price strength reflects the increase in the United States, United Kingdom, and Australian government bond yields which are an important determinant of Computershare’s earnings.