Treasure Chest: Is Computershare A Value Trap?

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

By Eva Brocklehurst

Computershare ((CPU)) is a value trap in Bell Potter's opinion. Risks are emerging in both the structural and cyclical underpinnings of the business and a preference is maintained for exposure elsewhere in the global software and services sector.

The broker believes the stock should be trading on a lower price/earnings multiple given a changing business mix as Computershare moves into mortgage processing, as well as headwinds for the core share registry and services.

The company is also expanding its UK business at a time when the British currency is moving against it and the full impact of the decision to exit the EU is unknown. Bell Potter envisages Computershare relying more on lower quality mortgage processing and a share buy-back to achieve growth over the next few years. This is expected to only just offset the drag elsewhere in the business.

Bell Potter forecasts flat US dollar denominated earnings growth over FY17 and FY18 following estimates for a decline of 10% in the current year. A continuation of the low interest rate environment, shrinking of the retail shareholder base and lacklustre global corporate activity are considered the main risks to the stock.

The company is required to hold large cash balances on behalf of clients and often has large amounts of borrowings in place. As such, fluctuations in relevant interest rates have a direct impact on earnings, the broker notes. There is also a risk that existing technologies behind the software Computershare provides will be superseded, or made redundant by advancements or new players in the market.

The broker, not one of the eight monitored daily on the FNArena database, downgrades underlying Australian dollar earnings estimates for FY17 and FY18 by 4.3% and 3.7% respectively, driven primarily by changes to its currency assumptions. A Sell recommendation remains in place and the broker's target is lowered to $7.50 from $7.80.

Citi recently lowered its earnings estimates for FY17 and FY10 by 10%, factoring in lower interest rates and current FX forecasts. The broker considers the stock offers reasonable value but, given little in the way of identifiable catalysts for upside, retains a Neutral rating. Credit Suisse, on the other hand, asserts that earnings are high quality and suspects growth could be weighted towards FY18-19, retaining an Outperform rating but acknowledging growth/momentum investors may be hesitant.

The database has two Buy ratings, four Hold and two Sell for Computershare. The consensus target is $10.75, suggesting 20.8% upside to the last share price. Targets range from $9.50 to $11.95.
 

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.

Click to view our Glossary of Financial Terms