Computershare Reinstates Growth Profile

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– Computershare granted approval for BNY Mellon shareholder registry acquisition
– Acquisition a positive as it boosts earnings growth during a downturn
– Brokers lift forecasts and price targets, one rating upgraded

By Chris Shaw

Having announced the proposed acquisition of the shareholder registry operations of BNY Mellon in April of this year it has been a long wait to finally receive regulatory approval for Computershare ((CPU)). Yesterday the US$550 million deal was approved and should now close early in January of next year.

Acquiring the BNY Mellon assets is something of a game-changer for Computershare, as UBS notes the deal will give the company around 70% of the US transfer agency market. It also offers a scale platform from which further unit cost reductions can be achieved as around 950 transfer agency clients and about 900 staff are being added.

The big plus of the deal, comments JP Morgan, is it provides Computershare with earnings per share (EPS) growth over the next two or so years, even allowing for a still subdued corporate activity and interest rate environment.

As JP Morgan points out, this will help offset what was expected to have been a subdued earnings outlook offered at Computershare's annual general meeting later this week. Now, with the acquisition being approved, securities brokers across the market have lifted earnings expectations.

As examples, JP Morgan has increased its EPS estimates by 5.6% in FY12 and by 9.9% in FY13, while Citi increases its numbers by 1% and 6% respectively. Deutsche Bank has actually trimmed its FY12 forecast by 4% but increased its FY13 forecast by 11%. Consensus EPS forecasts for Computershare according to the FNArena database now stand at US57.4c for FY12 and US68.5c for FY13.

Risk to these forecasts appears to be to the upside, in part because Computershare may be able to achieve synergies above the level currently expected as the BNY Mellon operations are fully integrated in coming years.

As well, Computershare has also recently acquired SLS and Serviceworks and these are expected to add to EPS by as much as 8% from FY13. RBS Australia suggests these deals have been positive moves by management, as Computershare has added growth during a downturn in its markets.

UBS has been a little more cautious on the BNY Mellon purchase in the sense that the market appears to have over-reacted to some extent. The share price yesterday rose by more than $1.00 per share on news the deal had been approved, whereas UBS suggests an increase of 70-75c may have been more appropriate.

Having said so, UBS does accept the BNY Mellon deal improves the earnings growth trajectory for Computershare, especially given management's solid track record with respect to synergies and integration of acquisitions.

The increases to earnings estimates across the market means increases to price targets. The FNArena database now shows a consensus price target for Computershare of $9.58, up from $8.42 prior to the BNY Mellon purchase being approved. Targets range from UBS at $8.75 to JP Morgan at $10.20.

Macquarie has made the only change in rating among brokers in the database, upgrading Computershare to Outperform from Underperform. This reflects the view Computershare now should be priced as a growth stock in the Australian market, given the combination of earnings stability and operational leverage to the upside is rare in the current trading environment.

Overall the database shows Computershare is rated as Buy four times and Hold three times, Credit Suisse similarly arguing there is value in Computershare at current levels that justifies an Outperform rating. 

The Hold argument is well stated by Citi, which suggests the market backdrop for Computershare remains difficult. This is evident in the broker's move to cut expectations for corporate actions revenue. When this tough outlook is added to the strong share price gains seen yesterday, valuation appears appropriate at current levels in Citi's view.

Computershare today is trading lower and as at 11.30am the stock was down 14c at $8.30. This compares to a range over the past year of $6.55 to $11.37. The current share price implies upside of around 14% to the consensus price target in the FNArena database.

 

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