Australia | Aug 11 2021
This story features COMPUTERSHARE LIMITED. For more info SHARE ANALYSIS: CPU
Inflationary pressures are looming yet official interest rates have not moved, requiring Computershare to juggle its earnings outlook to find growth
-Rebound in FY22 reliant on margin income and cost savings
-Computershare's allowance for legacy margin income in FY22 ahead of prior guidance
-More than half expected earnings growth, ex CCT, to come from cost reductions
By Eva Brocklehurst
While waiting for that kick along from higher official interest rates, Computershare ((CPU)) has had to balance its earnings outlook with cost reductions in order to keep inflation pressures in check.
The company is only expecting a small improvement in mortgage servicing as government restrictions related to the pandemic continue to impact on that segment. Hence, areas for growth include share plans and the core registry business.
Computershare has indicated a probable drop in corporate actions revenue, reflecting reduced capital raisings, although there could be some upside risk from M&A.
A strong second half to FY21 allowed the company to hit guidance, Ord Minnett observes, yet gearing seems elevated, if allowing for CCT (Computershare Corporate Trust), while mortgage servicing trends remain weak.
Guidance for management earnings per share of US53.4c in FY22 assumes growth on an elevated FY21 base in most divisions and Ord Minnett is concerned FY21 may have put many businesses, such as share plans and issuer services, at peak earnings, installing a high base from which future growth is demanded.
Citi suggests FY21 is likely to be the bottom of the earning cycle, although the rebound in FY22 will probably be modest. Moreover, the rebound is even more reliant on margin income and cost savings, while operating earnings growth is expected to be minimal.
The broker questions whether the outlook provided is strong enough for a stock trading on the current multiples, although acknowledges the potential for significant improvement in earnings if short-dated interest rates rise.
FY21 management net profit was US$283.7m and the final dividend of $0.23 resulted in a pay-out ratio of 67%. Morgan Stanley assesses the results was supported by lower-quality items, while business services missed estimates because of the timing of bankruptcy and class actions.
Staff share plans beat expectations because of better activity, while US loan balances missed forecasts, down -6%. Issuer services and mortgage revenues were in line with forecasts.
Having obtained regulatory approvals for the CCT (previously Wells Fargo Corporate Trust) acquisition, Computershare ultimately expects an eight-month contribution in FY22 and, when included with the impact of the equity raising, anticipates management earnings per share of US53.4c.
Margin income is guided at US$145m which Citi assesses leaves more than half of the anticipated 4% earnings growth, ex CCT, to be delivered by cost savings less inflation. Management expects a flat legacy margin outcome of US$107m, which Goldman Sachs points out seems to have locked in some yield through hedging. The broker does not rate Computershare.
The increased allowance for margin income was a surprise and Citi suspects much of it appears to relate to the extension the UK Deposit Protection Scheme contract. This scheme prevented the unwinding of certain term deposits as well as facilitating more.
UBS was expecting a softer earnings result and concludes guidance is driven by the revised legacy margin income, agreeing it is well above prior indications. The tax rate is also lower than expected. Furthermore, the broker suspects the market is being too optimistic on the underlying earnings outlook and is unlikely to give full credit to margin income upside.
Morgan Stanley agrees the composition of the results was softer expected and guidance is also looking that way. Still, the broker retains an Overweight rating given the exposure to higher rates, other growth options, and with the CCT acquisition also on track.
Cost inflation was benign in FY21 yet Computershare is now experiencing wage inflation across low-cost jurisdictions. Cost savings have been lifted by $30m beyond FY22 and will be realised in FY23/24.
Jarden expects FY22 will be a transition year ahead of the accretion from CCT and leverage to a recovery in central bank rates post the pandemic. Headwinds include higher wage inflation and a slower recovery in US mortgage services.
Yet Computershare has been able to offset these by terming out a higher proportion of margin income balances. Despite the enlarged cost reduction target, in order to keep outer year inflationary pressures in check, Jarden envisages a two-year growth rate in earnings per share of 16% post FY22.
The broker, not one of the seven monitored daily on the FNArena database, anticipates value upside in the medium term and has an Overweight rating and $17.65 target.
FNArena's database has three Buy ratings, two Hold and two Sell. The consensus target is $17.96, suggesting 10.3% upside to the last share price.
See also, Treasure Chest: Move Early On Computershare? on July 22, 2021.
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