Computershare: Sale of Low-Returning U.S. Mortgage Servicing Unit Heightens Focus on Core

The sale of wide-moat Computershare’s CPU 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.

This transaction is inconsequential to our AUD 25 fair value estimate and shares are trading broadly in line with our intrinsic assessment. Gross sales proceeds of USD 720 million, or roughly USD 530 million after taxes and fees, slightly exceed our implied aftertax valuation of around USD 470 million for CLS U.S. on a net basis.

We had previously forecast CLS U.S.’ losses to reduce significantly at the EBIT level, excluding margin income, in fiscal 2025, through cost-cutting and as macroeconomic conditions slowly improve. However, execution risks are high. Its announced sale offers shareholders swift monetization of the asset and reduces future uncertainties. There are undisclosed remnant expenses, though they are expected to be offset by likely benefits of Computershare’s transitional services agreement with Rithm and further cost-reduction plans. We estimate the remnant expenses need to amount to about USD 200 million in total for our fair value to reduce by 10% but such a quantum is unlikely.

The sale of CLS U.S. is expected to lift Computershare’s operating margins to 38% per year, on average, over the five years to fiscal 2028—above our prior forecast of 35%. Proceeds from the sale will support complementary acquisitions, organic growth investments, and shareholder returns including the AUD 750 million buyback.