Computershare To Benefit From M&A Rebound

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

By Chris Shaw

Having a competitive advantage in an industry is a good way to deliver solid performance and it is the advantage it has over its peers due to a strong position in core markets and a unique global presence that attracts Morgan Stanley to transfer agency and investor services group Computershare ((CPU)). The broker has initiated coverage on the stock with an Overweight rating and a price target of $13.10.

What supports the broker’s positive view is its expectation corporate actions activity, which includes mergers and acquisitions, will rebound in both 2010 and 2011 as the global economy recovers. It also expects an increase in initial pubic offerings and higher investor confidence in coming years, which should also provide an earnings boost.

While the market generally is forecasting a recovery in merger and acquisition activity, Morgan Stanley suggests investors are not attributing enough value to the company’s ability to leverage earnings from such a recovery. MS estimates the market is pricing in long-term growth of around 6%, which is below its own forecast of around 7%.

There is additional scope for stronger revenues from rising cash rates in the broker’s view, as it notes hedging currently in place rolls off by FY12. As well, Morgan Stanley notes the company’s balance sheet remains in good shape, meaning there is the potential for leveraged acquisitions to also boost shareholder returns.

Assuming its numbers prove correct, and it is forecasting earnings per share of US55c in FY10 and US62c in FY11, the broker expects the stock will re-rate as the rest of the market adjusts its numbers accordingly. As examples of where Morgan Stanley stands against others to cover the stock, Bank of America Merrill Lynch expects EPS of US52.6c and US57.2c respectively in FY10 and FY11, while Deutsche Bank is at US46c and US53c and JP Morgan is forecasting US48.8c and US53.3c.

Morgan Stanley’s forecasts imply a one-year forward Price to Earnings multiple of around 18 times, which it notes is a 22% discount to the average multiple during the company’s growth period from June 2003 to June 2007. It is also a premium of just 19% to the All Industrial ex Banks index, well below the stock’s average premium during that period of 40%.

Its numbers suggest FY09 will prove to be the bottom of the earnings cycle for the company, meaning the current multiple discount does not appear to be justified. Downside from current share price levels appears limited as the broker’s bear case scenario generates a valuation of $10.09, while its bull case scenario suggests a valuation of $16.52.

BA-Merrill Lynch recently offered a similar argument in justifying its Buy rating, pointing out the environment for corporate deals has improved as the global economy recovers. But Citi suggests the company’s share price already reflects this improved environment and so the stock is nothing more than a Hold in its view.

The FNArena database shows a total of five Buy ratings and five Holds, with an average price target of $11.30. Credit Suisse is the only broker with a higher target than Morgan Stanley at $13.81, while JP Morgan is the most conservative with its target of $9.57.

Computershare is trading slightly higher today and as at 2.45pm the stock was up 3c at $11.07. This compares to a trading range over the past 12 months of $6.11 to $11.32.

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