Expectations Falling For Computershare

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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

Earlier this month Credit Suisse lowered its earnings forecasts for Computershare ((CPU)) to reflect a marking to market of the group’s investments but today Citi has suggested further downgrades to earnings are likely as a number of factors are currently working against the company.

The broker points out the latest earnings guidance from company management suggested FY09 would be a flat or slightly down year. But the analysts also point out this forecast was predicated on no further falls in interest rates, two acquisitions being completed, no further gains in the US dollar and no further falls in global equity markets.

In recent weeks all four factors have gone against the company and in particular the level of merger and acquisition (M&A) activity, as on the broker’s numbers such deals of greater than US$100 milloin in magnitude fell by 49% as measured by deal value and by 47% in terms of deal volume.

While the broker notes Computershare appears to have done better than the market in this regard with falls of 12% in value terms and 40% in volume terms, it does highlight the downside risk to group numbers. Citi analysts also make the points it is difficult to accurately assess the value of deals done and M&A activity is just one area of corporate activity.

The other point the broker makes is ultimately it is the complexity of a transaction that drives profitability for computershare rather than simply the volume or value of the deals being attempted. As an example, Citi points out a drawn out, hostile, cross-border cash and scrip offer where frequent shareholder communications are required can deliver higher profits than a straight-forward, domestic, scrip-based friendly merger even if the company involved in such a bid is larger.

Factoring in both the fall in deals and the other adverse factors leads Citi to suggest the likelihood is consensus earnings numbers are too high. Having said that, the broker doesn’t appear to be factoring in significant downside as it continues to rate the stock as a Hold at current levels, reflected by the fact its target price of $7.43 is close to the current share price.

Opinion is divided among others in the market as the FNArena database shows a total of five Buy ratings, one Accumulate and three Holds in addition to that of Citi. The average price target on the stock according to the database is $9.37, largely thanks to Credit Suisse and UBS targets of $12.03 and $11.20 respectively. Citi’s target is the lowest in the database.

Shares in Computershare today are weaker despite a stronger overall market and as at 11.45am the stock was down 35c or 4.6% at $7.24. Over the past year the shares have traded between $6.11 and $10.34.

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