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Stock of the Day - Computershare (Expensive)

Computershare Limited (CPU) was found to remain leveraged to higher interest rates particularly in the US, Canada and the UK. The Company recently reconfirmed that its FY15E EPS is expected to be ~5% higher than FY14 although there is a dip expected in 1H15E EPS on the previous corresponding period. At the same time, owing to the absence of acquisitions, the 2H15E does not look very appealing either. During the year ended June of 2014, CPU reported sales of A$2.20 billion, which is an increase of 11.5% from that of 2013 (A$1.97 billion). The sales in the US were up 17.9% to A$970.55 million. CPU has a market capitalization of A$6.63 billion. The Company has paid a dividend for 6 straight years.


Financial Highlights (Source – Company Reports)

With the recent updates, we note that the registry maintenance revenue of US$383.1m is expected in 1H15E which is less than that recorded in 1H14. Therefore, one key thing to gauge would be the guidance on the outlook for margins on newly acquired registry contracts (including QBE and Medibank). The 1H15E business services revenue is also expected to suffer a decline in view of aspects such as loss of IML, Serviceworks, feeble market activity in bankruptcy administration and a dullness in US mortgage servicing transactions. There is reduction in margin income relating to rolling hedges seen during FY14. Specifically, the margin income dropped significantly to US$86.8m in 2H14 relative to US$105.8m in 1H14. It will be prudent to keep an eye over any near term betterment in US rates for supporting revenue growth. Thus, the outlook for FY15E revenue growth becomes an interesting piece in view of any such rise in US rates assisting the margin income.

The market anticipates an upside of ~$100m to margin income and 22% to management EPS in case the Company is able to achieve 1% higher investment return rates across the portfolio to what is presently being achieved. This comes under the norm if interest rates normalize to higher levels. Further, there may be a 14% improvement in management EPS with 1% increase across on the portion of the book that is unhedged. Nonetheless, declining balances may equipoise some of the leverage which may result from increasing rates. The Company’s average balances in 2H14 were US$14.1bn, up 4% on 2H13.



Regional Revenue and EBITDA (Source – Company Reports)

As of now, the currency support and a more promising corporate action environment may favor CPU. The global corporate activity has improved over November and December 2014 with 1H15 growth to 15% after an operating backdrop over September and October when global corporate activity dipped by 13% on pcp. But the lower margin income outlook has been a cause of worry.


Management NPAT Analysis (Source – Company Reports)

The Company may be able to achieve a good double-digit earnings growth not before FY17. Completed M&A deals in 4Q CY14 rose 13% YoY with 24% QoQ with the quarter being the highest quarter of completed deals since 4Q CY08. Cross border deals were strong and a high retail shareholder participation was noted - all supporting the 16% underlying earnings growth implied by CPU’s 5% management EPS growth guidance. Recently, the Company is found to trade on a 12-month forward P/E of 15.0x, representing a 1% P/E discount to the ASX200.


Management EPS and Dividend (Source – Company Reports)

Some aspects which may be crucial constitute changes in the USD exchange rate, changes in short-term interest rates that may affect deposit rates and returns from margin income, technology risks from new players and registry competition, acquisitions regulatory changes to do with securities market structure design and operational risk from mortgage foreclosure risks in Specialized Loan Servicing.


CPU Daily Chart (Source - Thomson Reuters)

Accordingly, we believe that the stock is expensive at the current price of $11.51.