Company Overview: Computershare Limited is engaged in the operation of investor services, plan services, communication services, business services, stakeholder relationship management services and technology services. Its segments are Asia; Australia and New Zealand; Canada; Continental Europe; United Kingdom, Channel Islands, Ireland & Africa; the United States of America, and Technology and Other. The investor services operations include the provision of registry maintenance and related services. The plan services operations include the provision of administration and related services. The communication services operations include scanning and electronic delivery. The business services operations include the provision of bankruptcy and mortgage servicing activities. The stakeholder relationship management services group provides investor communication and management information services. Its technology services include the provision of software, specializing in share registry and financial services.
 

 CPU Details

Impressive Performance by Core Business: Computershare Limited (ASX: CPU) is engaged in the operation of investor services, employee share plan services, communication services, business services, stakeholder relationship management services and technology services. The company’s business is majorly spread across Australia, United States, Canada, and the United Kingdom. Based on the company’s financial growth trajectory over the period FY15 to FY18, there has been a top-line CAGR growth of 5.1% over the period with FY15 and FY18 revenue amounting to $1,971.3 million and $2,289.9 million, respectively. The company achieved bottom-line CAGR growth of 25.0% with FY15 profits at $153.6 million and FY18 profits at $300.1 million. Considering the product wise revenue, the company mainly operates through 7 segments with Business Services and Register Maintenance accounting for 39% and 30% of the total revenue in 1HFY19. Employee Share Plans, Communication Services and Corporate Actions represented ~10%, 8% and 8% of the overall revenue. Comparative smaller chunk of the revenue was held by Stakeholder Relationship Management at 3% and Corporate & Technology at 2%. During the half year ended 31 December 2018, the company generated revenue amounting to $1,146.5 million, up 1.7% on the prior corresponding period. EBITDA for the period stood at $335.4 million, depicting an increase of 14.3% on 1HFY18. NPAT stood at $192 million, up 15.1% on prior corresponding period NPAT of $166.8 million. Group EBITDA margin increased from 26% in 1HFY18 to 29.3% in 1HFY19. Earnings per share were reported at 35.37 cents, up 15.5% on pcp. There was an uplift of 40bps in return on equity at 27.1%. The company declared an interim dividend of 21 cents per share, up 10.5% on the prior corresponding period.

The company expressed its key focus towards generating revenue from mortgage value chain, delivering synergy benefits across the U.S. and UK, and leveraging the growth in the challenger banks in the UK. With the clear scope of growth in Mortgage services, strategic plan to reinvigorate registry business to organic growth, ongoing cost programmes, recent acquisitions to strengthen the revenue base, conservative balance sheet, etc, the company is well-placed to ripe the benefits in the long run. The recent earnings revision for FY19 also confirms the growth path, the company is targeting for the coming future.
 

1HFY19 Key Financials (Source: Company Reports)

Key takeaways from Investor Presentation: The company recently released an investor presentation to discuss the long-term strategies pertaining to its business segments. Few major highlights from the presentation are as follows:
(a) Issuer Services: The company updated regarding the introduction of new Issuer Services by bringing together its current set of Registry and related services into a single business for growth. The business will include a strong product set with enduring client relationships and opportunities.

The company has been rolling out initiatives for the growth of its core business. Its Front Office initiatives are assisting in delivering improved client retention. The company is in the process of extending the range of business to consumer services. The Issuer Services business is primarily focused on meeting needs of corporate issuer clients. The B to C retail investor services are important and continue to be a focus for investment and development. The company is now deploying a range of tools to improve the range of services.

(b) Mortgage Services: Under Mortgage Services, a delay of 12 months until June 2020 in UKAR migration was reported. The company has so far migrated around $16 billion of assets to date and is expecting to migrate $14 billion of assets in three tranches over the next few months. The residual assets amounting to approximately $15 billion will be transferred in another three tranches over the remainder of FY20.

Growth in Mortgage Services: During the period, US Mortgage Services revenue increased by 11.2%, from $143.4 million in 1HFY18 to $159.5 million in 1HFY19. Revenue from UK Mortgage Services stood at $128.8 million, reporting an increase of 5.8% on prior corresponding period revenue of $121.7 million. Consolidated revenue from both the locations witnessed a rise of 8.8%. Total Mortgage Services EBITDA, during the period, stood at $59.6 million, depicting an increase of 5.7% on pcp EBITDA of $56.4 million.

UPB in the US reported a rise of 14.3% to $92.6 billion with major additions towards the end of the period. High margin servicing-related fees went down by 4.1% in comparison to the prior corresponding period. The company completed the acquisition of LenderLive in 31 December for strategic expansion. Revenue growth in the UK was attributable to new originations and project fees.


Positioned for disciplined growth (Source: Company Reports)

Acquisition of LenderLive: The company acquired LenderLive Financial Services, LLC and its operating subsidiary LenderLive Network, LLC that further strengthened its growth in the U.S. mortgage services market, adding scale to existing fulfilment and secondary market services. The acquisition further enhanced the company’s ability to work with both government-sponsored and private market investors.

Growth in Employee Share Plans: Total Employee Share Plans revenue for the period was reported at $118.4 million as compared to $106.5 million in the prior corresponding period. Fee revenue went up by 13.3% from $51.2 million in 1HFY18 to $58.0 million in 1HFY19. Transactional revenue was reported at $42.7 million, up 8.7% in comparison to the prior corresponding period value of $39.3 million. Margin income reported an increase of 1.4% from $7.0 million in 1HFY18 to $7.1 million in the current period.

Acquisition of Equatex: In May 2018, the company entered into an agreement to acquire 100% of Equatex Group Holding AG, a leading European employee share plan administration business. Equatex has its headquarters in Zurich, Switzerland. The company completed the acquisition in November 2018 for a consideration of EUR 354.5 million. The company reported a remarkable performance since completion of the acquisition with $12.4 million revenue contribution in 1H19. The acquisition of Equatex was a key highlight that helped to create market leadership across Europe and the UK. The integration of Equatex is underway with a detailed plan to deliver $30 million total synergy benefits over the next 33 months across the combined business.


Equatex six-month scorecard, on target, synergies reaffirmed (Source: Company Reports)

Performance of Register Maintenance and Corporate Actions: Total register maintenance revenue during the period was reported at $345.4 million, up 4.4% as compared to $330.8 million in the prior corresponding period. Corporate actions revenue, during the period, was reported at $93.2 million, up 9.4% in comparison to the prior corresponding period. Combined revenue for the services reported a rise of 5.4% at $438.6 million in the current period. Register Maintenance and Corporate Actions EBITDA stood at $162 million, up 16% in comparison to the prior corresponding period EBITDA of $139.6 million. EBITDA margin went up by 330 bps from 33.6% in 1HFY18 to 36.9% in 1HFY19.

Under the segment, the company reported excellent register maintenance results from the U.S. with revenues increasing at a rate of 5.9%. Margin income gains, price increase and cost disciplines, positive change in industry structure, new client wins and retention, were a few factors leading the growth in the U.S.

Since 1HFY17, the combined revenue for Register Maintenance and Corporate Actions increased by 9.8%. EBITDA from the services increased by 30% and EBITDA margin by 5.7%, over the same period.


Revenue and EBITDA from Register Maintenance and Corporate Actions (Source: Company Reports)

Key Risks: The company’s material risks are divided into three major areas including:

(a) Strategic and Regulatory Risk– Since the company operates in highly-regulated markets around the world, its success can be impacted by changes to the regulatory environment and the market structure.

(b) Financial Risk– A material proportion of the company’s revenue is derived from a transactional activity that is dependent on factors difficult to predict.

(c) Operational Risk– The company deals with a high volume of daily transactions that can be exposed to data loss and security breaches.

Top 10 Shareholders: The top 10 shareholders have been highlighted in the table which together form around 25.65% of the total shareholding. Morris (Christopher John) holds the maximum interest in the company at 5.94%, followed by Challenger Managed Investments Ltd holding of 4.98% in the company.

Top 10 Shareholders (Source: Thomson Reuters)
 
Key Metrics: For 1HFY19, the company reported a gross margin of 35.4%, which is higher than the gross margin of 32.6% in the prior corresponding period. EBITDA margin for the first half was reported at 29.1% against pcp EBITDA margin of 25.6%. Operating Margin during the period stood at 21.5%, higher than the margin of 18.7% in pcp. Net margin for the period was higher in comparison to both pcp and industry median at 23.5%.


Key Metrics (Source: Thomson Reuters)

Trading Update: The company expects Management EPS for FY19 in constant currency to increase by around 12.5% in comparison to FY18. Group tax rate for the year is expected to be slightly lower at approximately 27.5% as compared to 28.3% in FY18. Revenue from Corporate Actions and event-based activities is expected to be lower in the second half than in pcp. The company expects client balance in 2HFY19 to drop in comparison to the first half.


Key Valuation Metrics (Source: Thomson Reuters)

Valuation Methodology:
Method: EV/EBITDA Multiple Approach (NTM):

EV/EBITDA Based Valuation (Source: Thomson Reuters)

Stock Recommendation: The stock of the company generated returns of -0.83% and -3.76% over a period of 1 month and 3 months, respectively. The first half was characterised by a strong growth in EPS with outperformance driven by ongoing profitable growth in Register Maintenance, margin income gains and a reduced tax rate. The company further strengthened its market position through the recent acquisitions of Equatex and LenderLive. It reported impressive performance in the largest profit business of Register Maintenance and Corporate Actions with an uplift in key metrics including revenue, EBITDA, and EBITDA margin. Continued execution of growth and profitability strategies will support to drive operational gearing and further margin expansion. The company witnessed an increase in group EBITDA margin on pcp. The period also saw a high increase in margin income by $47 million to $126.6 million, that helped to drive NPAT growth. Considering the performance in the first half, the Management EPS guidance was also upgraded from 10% to 12.5%. Furthermore, the company has well defined strategies in place for its key business that are expected to drive future growth. Based on the foregoing, we have valued the stock using the relative valuation method, EV/EBIDTA multiple, and arrived at the target price of $18.24 (low double-digit upside (%)). Hence, we recommend a “Buy” rating on the stock at a current market price of $16.530, down 0.601% on 12 July 2019.

 
CPU Daily Chart (Source: Thomson Reuters)

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