Computershare: Set For Upside

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

 – Computershare result meets expectations
 – Guidance for earnings growth in FY13 appears achievable
 – Stock remains leveraged to an improvement in operating conditions
 – Broker ratings remain weighted to Buy

By Chris Shaw

Given a solid history of meeting earnings expectations, it is of little surprise registry business Computershare's ((CPU)) full year profit of US$272.8 million was just above the market's consensus forecast. Organic revenue declined by 3.5% in the period, offset by solid performance from acquisitions made in 1H12.

As Deutsche Bank notes, the recent SLS and SWG acquisitions boosted 2H12 revenues by US$102 million, which was 64% higher than when announced last August. At the same time, cost synergies from the BNY Mellon shareholder services acquisition are ahead of schedule.

This means earnings metrics from the acquisitions are attractive, UBS estimating an acquisition multiple of around 8.4 times in EBITDA (earnings before interest, tax, depreciation and amortisation) terms. This is below Computershare's trading multiple of around 10 times EBITDA. The acquisition multiple should fall to closer to five times as further synergies are realised.

As more synergies come through the newer businesses are expected to be the main drivers of earnings growth in coming years. BA Merrill Lynch estimates these will account for three quarters of earnings per share (EPS) upside in FY13 and FY14.

The acquisitions mean Computershare's balance sheet is relatively geared, UBS estimating a ratio of 2.9 times on a net debt to EBITDA basis. This will have the shorter-term impact of limiting the group's acquisition potential in the broker's view.

Despite this, the earnings growth outlook for Computershare remains solid, with management guiding to EPS growth of 10-15% in FY13 despite ongoing macroeconomic headwinds. The guidance was broadly as the market had expected, as post the result brokers have made relatively modest changes to earnings estimates.

As examples, Deutsche has trimmed EPS forecasts by 1.5% for both FY13 and FY14 to account for a weaker transactional outlook, while Macquarie has lowered FY14 forecasts by 3% to account for lower margin assumptions.

The price target impact has been minimal, the consensus target for Computershare according to the FNArena database moving to $8.80 from $8.77 prior to the result. Targets range from UBS and Citi at $8.00 to BA-ML at $9.35.

Brokers remain positive on Computershare, as the database shows six Buy ratings against two Hold recommendations. For Deutsche a Buy is justified as Computershare's macro revenue leverage has increased.

On Deutsche's numbers, a return to through-cycle corporate activity levels could boost net profit after tax by as much as 15%, while a 1% lift in interest rates could boost earnings by more than 20%. BA-ML agrees there is upside from an eventual recovery in the corporate actions cycle, suggesting at present the market is pricing in a 'pessimism-into-perpetuity' outlook.

RBS Australia offers a similar argument, noting while timing of any recovery remains impossible to predict with any accuracy when it does occur it offers significant earnings upside potential for Computershare.

UBS is less bullish and suggests a Neutral rating is appropriate, as while there is potential for synergy-led earnings growth the current earnings multiple of around 15.6 times for FY13 is relatively expensive. An update by Citi, which also rates Computershare as a Hold, has yet to be received by FNArena.

Shares in Computershare today are up in a slightly higher overall market and as at 11.35am the stock was 16.5c higher at $8.165. This compares to a trading range over the past year of $6.55 to $9.17 and implies upside of around 8% to the consensus price target in the FNArena database.

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