Not Everyone Convinced Computershare Gains Are Sustainable

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This story features COMPUTERSHARE LIMITED.
For more info SHARE ANALYSIS: CPU
The company is included in ASX50, ASX100, ASX200, ASX300, ALL-ORDS and ALL-TECH

By Chris Shaw

Having peaked at around $12.00 prior to the credit crunch of July and August registry services group Computershare ((CPU)) failed to rally along with the broader market over the past couple of months, its shares recently trading as low as $8.50.

The downtrend quickly reversed after management yesterday lifted earnings guidance for the full year, indicating profit growth of around 30% would be achieved in FY08. This is double the previous guidance of an increase of at least 15%.

As a result brokers have lifted earnings forecasts for coming years but the market remains divided as to whether or not the gains will prove to be sustainable over the longer-term.

In earnings per share terms the increases to forecast earnings range from 10-15% in coming years, putting consensus estimates at US49-50c for FY08 and US50-56c in FY09.

According to UBS the increases reflect regional strength in the company’s Hong Kong, Canadian and Australian operations and margin improvements, Credit Suisse noting the margin improvement is being generated from both the revenue and cost sides of the business.

In the broker’s view this makes the improvement in earnings more sustainable, as previous increases to earnings guidance were generally the result of acquisitions and so were more one-off in nature.

According to Credit Suisse the risk to earnings remains to the upside, so the broker has retained its Outperform rating. UBS is similarly positive, agreeing with Credit Suisse there is upside risk to earnings forecasts thanks to the potential for re-pricing benefits in both the Australian and US operations as existing contracts are renegotiated.

Also positive is Deutsche Bank, the broker upgrading the stock to Buy from Hold on valuation grounds as the shares are now at a 20% discount to the broker’s revised target price of $11.75, up from $11.00 previously.

In the broker’s view the margin enhancement being generated by the Equiserve acquisition is greater than it had anticipated, while rational pricing in the company’s markets means the gains should be sustainable over the medium-term.

The broker also suggests there is scope for additional capital management initiatives if no further sizable acquisitions are made, as it estimates by FY09 there should be US$750 million in available capital. The company recently completed a buyback of 45 million shares.

ABN Amro remains unconvinced the good times will continue for the group though, as the likely weaker global merger and acquisition activity from a weaker US economy leads it to suggest the company will struggle to maintain its current momentum.

Citi has a similar view, suggesting the gains currently being enjoyed are a function of the cycle and the outlook is not as bright in future years. Reflecting this, the broker has increased its earnings forecasts but points out the valuation impact is less pronounced and it has increased by only about 5% to $11.00 from $10.50.

The broker remains the only one in the FNArena database to rate the stock as a Sell, which compares with four Buy ratings, one Accumulate and four Hold ratings. The average price target on the stock is $10.58, up from $10.23 prior to the guidance upgrade. Thomson One Analytics shows a median price target of $10.55.

Shares in Computershare today are slightly higher and as at 12.50pm were up 7c at $9.87.

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