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Computershare Video


 

Stock Of The Day - Computershare  (Expensive)

Computershare Limited (CPU) reported some positive trends in Register Maintenance with higher listings, Corporate Actions with higher M&A efforts, and Business Services with few new bankruptcy cases in first quarter of CY15. However, Employee Share Plans and interest rate cuts in Canada and Australia were few drags. Particularly, 1HFY15 results for the period ending 31 December 2014 entailed net profit after tax attributable to members of $15.5 million. This is indicative of 88.9% slump over the previous corresponding period (pcp). Non-cash impairment charge of $109.5 million against the carrying value of goodwill related to the Voucher Services business led to said decrease. The US business, Canada and the UK business were impacted by poor yields on client balances. However, earnings were positively impacted by contributions from acquisitions, corporate actions in Canada, betterment in Hong Kong business lines (Register Maintenance), and efforts in the direction of cost management. Statutory basic earnings per share dropped by 88.9% to 2.79 cents while the operating profit before tax was reported to be $47.5 million as opposed to $174.8 million for the half-year ended 31 December 2013. There was a drop in operating cash flows to $147.7 million from $191.9 million of pcp. An interim dividend for the current financial year of AU 15 cents per share was announced which is franked to 20%. This is AUD 1 cent higher than the interim dividend in 2014.


Financial Performance (Source – Company Reports)

The total revenue for the half-year also dipped 1.7% to $956.7million over pcp. The key contributors to revenue during 1HFY15 included acquisition of Registrar and Transfer Company in the US, the Canadian Olympia asset and Homeloan Management Limited in the UK. Nonetheless, effect from the maturity of a high yielding deposit facility in the US in December 2013 along with loss of a large client given the buyout in the Australian utilities back office administration business outweighed the positives and affected earnings and revenue. In addition, there were effects from divestment of the Highlands Insurance LLC business. The loss of a subservicing contract in the loan servicing space in 2HFY14 was another factor impacting the result. CPU faced challenging situation in UK with share plan maturities and lower margin income hitting the UK employee plans revenue. Further, stakeholder relationship management revenues were impacted by the sale of the Pepper Group. The foreign exchange rate also hindered the revenue to some extent.


Management Revenue & EBITDA_Half Year Comparisons (Source – Company Reports)

The revenues slumped in Australia and New Zealand by 9.8% on 1H14 to $178.9 million and EBITDA decreased 13.8% to $34.9 million predominantly owing to Serviceworks’ loss of largest client to take-over and depreciation of AUD. Revenues in Asia were 9.9% up than 1H14 at $60.3 million and there was a 20.1% rise in EBITDA to $21.7 million. Growth in funds business was noted in India. There was a surge in revenues and EBITDA for United Kingdom, Channel Islands, Ireland & Africa (UCIA) by 10.7% to $165.6 million on pcp and 11.1% to $61.8 million, respectively. The Irish business and the South African business witnessed good results.

Continental Europe witnessed revenue growth of 4.0% on pcp while the EBITDA rose 73.3%. Performance by Russian business, growth in Italian business and reclassification of revenue in the Employee Share Plans business helped raise the revenue. There was a disappointment with regards to the German business with disposal of the Pepper Group impacting the revenue negatively. There was a 6.0% drop in revenues from United States on 1H14 to $403.7 million. The EBITDA also saw a dip of 21.2% at $83.0 million. Various factors such as the sale of Highlands Insurance LLC, loss of subservicing contract in the loan servicing business, poor filings in the bankruptcy administration business, poor shareholder activity, and low yields on client balances impacting the investor services business, altogether led to the aforesaid dip. Canadian revenues were up 7.7% on pcp at $97.1 million and EBITDA grew 15.0% to $42.4 million. Improvement in Corporate Actions revenue and contribution from few acquisitions served as few positives.

There has been a dip of $180.3 million to $3,627.9 million for total assets at 31 December 2014. CPU reported that the Shareholders’ equity also decreased $144.8 million to $1,122.4 million owing to the impairment charge against Computershare Voucher Services.



1H15 Client Balances_Interest Rate Exposure and Currency (Source – Company Reports)

CPU now expects a higher Management EPS for the full year FY15 relative to FY14 in view of strengthening of the USD and weakening of interest rate markets.


Debt Facility Maturity Profile (Source – Company Reports)

CPU recently announced for agreeing the terms for the acquisition of Valiant Trust Company assets from Canadian Western Bank. This has been stated for a maximum consideration of CAD 33 million if the revenue retention threshold is met. The purchase is planned to be complete by May 2015. We also note favorable developments in various geographic segments for CPU. For instance, we note the successful completion of the IPO of Genesis in New Zealand. In Canada, the project to launch new Private Capital Solutions product has been reported to move well. The US mortgage servicer, SLS, is yet to witness consistent growth and expectations increase with the acquisition of Mortgage Servicing Rights.


CPU Daily Chart (Source - Thomson Reuters)

Nonetheless, there seems to be pressure in terms of pricing and competitiveness with regards to CPU’s investor services operations in its main markets. Further, legislative changes are proving to be a bottleneck for growth. For instance, regulatory environment has become challenging in Ireland and India (Investor Services & Mutual Funds). Then, the Oil & Gas Royalty business revenue may witness impact from lower oil prices in near future for Canada region. In absence of great acquisitions and disappointing results for 1HFY15, the performance looks to have a dampened position. There exist limited organic growth opportunities in core investor services business owing to fee and margin risks. In a way, we do not see any substantial earnings momentum in the near term.

Based on the foregoing, we believe that the stock is EXPENSIVE at the current price of $12.28.