Computershare’s FY14 Upside

This story features COMPUTERSHARE LIMITED. For more info SHARE ANALYSIS: CPU

 – BA-ML reinstates Computershare coverage with a Buy
 – Earnings growth to come from recent acquisitions
 – Cyclical recovery should also boost earnings
 – Longer-term valuation attractive in BA-ML's view

By Chris Shaw

BA Merrill Lynch had not offered coverage on Computershare ((CPU)), provider of share register and related services, for two years but the broker has today reinstated research on the company with a Buy rating and above market earnings estimates.

Driving part of this growth will be the Shareowner Services acquisition, which is important in the view of BA-ML as it adds growth to the Register Maintenance division, which is a mature growth market. The acquisition is forecast to boost earnings per share (EPS) by 3%, 9% and 13% respectively in FY12-FY14.

As well, BA-ML sees Computershare as well placed to benefit from an eventual cyclical recovery, which should boost the level of corporate actions. On BA-ML's numbers about 17% of FY11 revenues for Computershare came from businesses structurally reliant on corporate actions such as M&A and IPO activity.

BA-ML's model suggests a 20% recovery in transactional revenues in FY13 and a 17% increase in FY14. This would be conservative relative to historical levels, as the broker notes such growth would still leave FY14 numbers at just 28% of the peak level achieved in FY08.

Computershare continues to expand elsewhere and BA-ML sees this as a longer-term positive for group earnings as well. Recent acquisitions of Specialised Loan Servicing in the US and Serviceworks Group in Australia should deliver segment revenue growth for the Business Services division of 24% in FY13 and 6% in FY14 according to BA-ML, with upside potential from further expansion overseas.

Factoring all this in, BA-ML is forecasting EPS for Computershare of US48.4c this year and US59.1c in FY13. These estimates are broadly in line with the consensus forecasts according to the FNArena database of US48.3c this year and US60c next year.

BA-ML concedes earnings for Computershare will face some shorter-term pressures, but from FY14 an upturn is expected given a positive outlook on both costs and growth prospects in the Business Services division. 

This is reflected in its forecasts, as BA-ML is anticipating FY14 EPS of US74c, which the broker notes is currently about 5% ahead of consensus expectations. Helping is anticipated strong growth in the Employee Share Plans part of Computershare's business, while Communication Services is expected to receive a gradual boost from the recent Digital Post initiative.

Based on BA-ML earnings estimates the broker sets its price target for Computershare at $9.50, which equates to an earnings multiple of 14.5 times. With this being a conservative multiple historically and a discount to peer averages for FY13, BA-ML sees sufficient upside to justify a Buy rating. Also helping the investment case are solid dividends, which are expected to generate a yield of around 3.5% in both FY13 and FY14.

Supporting this positive view is the fact Computershare enjoys a large recurring revenue base, which limits the downside risk to earnings if currently difficult trading conditions continue for longer than BA-ML expects. 

Others in the market agree, as the FNArena database shows Computershare is rated as Buy six times and Hold twice, with a consensus price target of $9.07. Citi and UBS are the dissenters and both rate the stock as a Hold. These ratings are based on the views a recovery in earnings is more likely to come in FY14 than FY13, meaning there is little to drive the share price shorter-term.

Shares in Computershare today are down slightly in a weaker market and as at 10.45am the stock was 5c lower at $8.47. This compares to a trading range over the past year of %6.55 to $9.58, the current share price implying upside of just under 7% relative to the consensus price target in the FNArena database.

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