Citi More Cautious On Computershare

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

 – Citi goes against consensus on Computershare
 – Suggests none of the company's US businesses are in growth markets
 – This earnings pressure is likely to limit share price upside
 – Neutral rating retained by Citi

By Chris Shaw

When BA Merrill Lynch reinstated coverage on Computershare ((CPU)) earlier this week it was with a Buy rating and above market consensus earnings estimates, the positive view on the stock being matched by a majority of the brokers in the FNArena database (See: Computershare's FY14 Upside).

One of those to hold off on a positive rating is Citi. The broker rates Computershare as Neutral, based on the view the company remains in an earnings downgrade cycle as none of the group's US businesses are positioned in growth markets.

As evidence of this, Citi notes the US registry maintenance market shrank by 5% in 2011, meaning the Transfer Agency (TA) account base is now 15% lower than was the case five years ago. The news was worse for Computershare specifically, as Citi points out the company's TA account base declined by 8% last year, while registry maintenance revenues fell by 6%.

A reversal in the market trend appears unlikely as the TA market in the US is becoming more competitive. Citi notes another manager, Broadridge, is attempting to transfer TA accounts across the broker nominee style accounts as a means of lowering registry maintenance fees for listed companies.

At the same time, the rapid growth of ETFs (Exchange Traded Funds), low IPO activity following the Global Financial Crisis and a general shift away form equities as households deleverage is likely to drive further declines in the TA market in the view of Citi.

While the recent Shareowner Services acquisition has positioned Computershare for some short and medium-term growth in the TA market, the longer-term outlook of a market in decline leads Citi to suggest US growth options for Computershare are more likely to be focused on mortgage servicing.

To reflect this potential shift Citi has trimmed its registry revenue forecasts, though overall earnings are broadly unchanged as allowance has been made for two new accounts in Computershare's Business Services division.

Both of the acquisitions – SLS and ServiceWorks – offer expansion possibilities in the view of Citi, more so than the vertical acquisitions made by the company in both 2009 and 2010. 

A review of its model leaves Citi forecasting earnings per share (EPS) for Computershare of US48.7c this year and US59.1c in FY13. These estimates compare to consensus forecasts according to the FNArena database of US48.3c and US60c respectively.

The expected structural decline in US shareholder numbers and the fact equity market turnover in all of Computershare's key markets means little scope for share price outperformance in Citi's view, which underpins the broker's Neutral rating.

Only UBS agrees and similarly rates Computershare as Neutral, while six of the eight brokers in the FNArena database rate Computershare as a Buy. The consensus price target for the stock is $9.07, while Citi's target stands at $8.50.

Computershare today is trading slightly lower in a weaker overall market and as at 11.00am was down 3c at $8.31. The trading range for Computershare over the past year has been $6.55 to $9.58, with the current share price implying upside of just under 10% relative to the consensus price target in the FNArena database.

 
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