The company and its operations
The company is a global market leader in transfer agency and share registration, administration of employee equity plans, proxy solicitation and communication with stakeholders. They also have specialist activities in corporate trust, mortgage, bankruptcy, class-action and utility administration as well as a broad range of other diversify services relating to finance and governance. It was founded in 1978 and has a reputation for expertise in high integrity data management, high-volume transaction processing reconciliation and payments and has a customer roster of many leading organisations in the world. With its 15,000 employees, it is present in all the major financial markets. It has grown more than 100 times since its flotation in 1994 and this growth has been largely by acquisition both laterally and geographically.
Worldwide Operations (Source - Company Reports)
Results for 1HY 2015
Operating revenues for the period at $ 959.5 million were down 1.8% for the same period of the previous year and down 6.3% over the preceding half year while management EBITDA at $ 259.3 million was down 2.9% and 5.2% respectively. EBITDA margin at 27% was down from 27.3% in the same period of the previous year and up from 26.2% in the preceding half year. Management net profit at $ 160.6 million was down 1.8% and 6.3% respectively resulting in an EPS of 28.88 cents per share and an interim dividend of $ .15 per share was declared which is up one cent per share over the previous year and flat compared to the preceding half year. Dividend franking was 20% flat over the previous year and the preceding half year and cash flow from operations at $ 147.7 million was down 23% and 32.1% respectively.
Financial Highlights (Source - Company Reports)
Analysis of half-year revenue
The analysis of half-year revenue by geographical area shows the most sizeable contribution made by the US while the revenue by segment is led by register maintenance.
The compression in yields on the margin income portfolio has been a notable headwind in the recent past as the diagram below illustrates. The company expects that in the short term, challenges from margin income are set to persist because of the combination of lower returns on the reinvestment of maturing deposits and short-term investment limitations in some areas of operation such as deposit protection schemes. This is expected to more than offset the expected short-term rate increases indicated by the increased yields in some markets.
Some key financial metrics
EBITDA interest coverage has improved from 8.6% in the preceding half-year to 10.2% in this half-year and continues to show considerable strength. The ratio of net financial indebtedness to EBITDA has improved by 2.13 times to 2.28 times inclusive of SLS advance facility and 1.96 times to 2.10 times exclusive of this facility. An analysis of the balance sheet reveals that interest-bearing liabilities grew by 2.2% to $ 1.695 billion from June 2014 to December 2014 while cash holdings declined by 5.3% from $ 509 million to $ 482 million. Net debt grew by 5.59% to $ 1.21 billion.
The operating environment
Registry
In an environment of limited opportunities for acquisitions, a focus on cost and product innovation remains the key. On the cost side, the premises rationalisation strategy in the US provides the most substantial opportunities because of the launch of the new operations centre in Louisville in Kentucky. The company is taking a rational approach to the expansion of this facility because of the benefits to be gained from optimal size. The recent acquisitions of Olympia in Canada and R&T in the US have met expectations and the Valiant acquisition in Canada has just been completed. Customer satisfaction and retention continues to be strong globally but in most markets, price competition continues to be a notable feature. Corporate action revenues continue to be at weak levels because of reduced levels of retail participation, diminished secondary market capital offerings and withdrawal of a number of previously announced M&A transactions though this has been offset to some extent by new strategies for products and pricing.
Plans
The growth achieved in recent times did not happen in the first half because of a number of factors, the company continues to be optimistic about business opportunities particularly in Asia and Europe. With the completion of successful integration of recent European acquisitions, the focus has now moved to investments in services, systems and products to reinforce the market leadership position. There are few anti-trust constraints for acquisitions but the desirable assets have to be acquired at reasonable prices. New opportunities are being created by shareholder activism but a steady flow of profitable proxy fight mandates continue to be elusive.
Business services
In mortgage services, the company acquired Specialised Loan Servicing in the US late in 2011 and Homeloan Management Ltd in 2014 and continues to be optimistic about the market opportunities. The SLS growth strategy is to acquire and service legacy MSR products and without capital partners and some balance sheet transactions are scheduled to close in the fourth quarter of FY 2015. Credibility and track record are being strengthened and long-term services being established. In the case of HML, growth strategy is focused on synergies and operational efficiency and the new large-scale opportunities in the market such as UKAR. The strengthening of the UK mortgage market means that there are new opportunities but cost reduction is essential. Corporate Trust in Canada continues to perform strongly but there may be a negative impact from recent interest-rate decreases and the slowdown in oil and gas royalties. Deposit Protection Schemes have been successfully developed and delivered over the past 10 years and growth continues to be robust because of the growing private rental sector.
Priorities and strategies
Strategy continues to seek acquisitions and other growth opportunities which can produce value and enhance shareholder returns. Front-office skills will be continuously improved to protect and grow revenues and operational quality will be pursued through benchmarking and technology. Focus areas will remain what is best for the future by protecting profitability in mature businesses through revenue and cost initiatives, evaluating new investment opportunities with high thresholds of investment and superior management of the asset portfolio.
CPU Daily Chart (Source - Thomson Reuters)
While there is no doubt that increased levels of global corporate activity are good for this company, headwinds remain such as depressed income levels on funds invested on behalf of clients. Pricing and competitive pressures remain and we believe that the stock is
expensive at the present levels though some investment could be considered if there is a further pullback in share prices.