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Treasure Chest: Computershare: A Safe Haven Leveraged to Rising Rates

Treasure Chest | Jun 22 2022

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

FNArena's Treasure Chest reports on money making ideas from stockbrokers and other experts. Jarden and Morgan Stanley set higher target prices for Computershare due to leverage from rising interest rates.

By Mark Woodruff

Whose Idea Is It?

Analysts at Jarden and Morgan Stanley. 

The subject:

Jarden assesses Computershare ((CPU)) is the most leveraged stock in the Financial sector to rising risk-free rates.

Morgan Stanley also likes the company as a safe haven and anticipates sound medium-term earnings growth. An Overweight investment thesis is also supported by the broker’s new US70c forecast for the Australian dollar, down from US74 cents.

The analysts' margin income estimates are increased by around 20% for FY22-24 due to higher interest rate forecasts, and the target price is raised to $29.50 from $28.20.

Jarden also sees over US$100m upside to consensus margin income forecasts over FY23 and FY24, which should provide an offset to the softer backdrop for transactional revenues and higher operating cost inflation in FY23. The Overweight-rated broker raises its target price to $26.25 from $24.00.

The analysts also anticipate valuation support from stronger cashflows (reduced gearing), which should result in better medium-term balance sheet optionality. Assuming no acquisitions, it’s estimated share buybacks of up to 13% may be implemented by FY26, which would further enhance earnings per share beyond that financial year.

While Jarden notes corporate actions are already towards the low end of the range over the past decade (as a percentage of global equity market capitalisation) and material additional downside is considered unlikely, revenue forecasts from this source are lowered for Computershare in FY23 by -12.5%.

The broker cites key risks to its thesis which include lower-than-expected global interest rate rises, weaker markets impacting transactional revenues and higher-than-expected cost inflation.

Last week, Ord Minnett upgraded its rating for the company to Accumulate from Hold, highlighting a greater sensitivity to benefits from rising interest rates versus the risks from rising expenses in an inflationary environment. The broker’s target price was also raised to $26 from $25.

The FNArena database has seven broker ratings for Computershare, with five Buy (or equivalent) ratings, one Hold and one Sell. The average target price set by brokers is $26.47, which suggests 12.1% upside to the latest share price.

More info:

Across Computershare’s key margin income regions, Jarden estimates weighted-average FY23 futures for central bank cash rates have increased by around 100 basis points to 2.4%.

This implies to the analyst a benefit of over US$180m on over US$20bn of exposed unhedged funds, after assuming a more conservative capture rate of 70% of incremental rate rises than the company’s prior estimate for 80%.

As a result, the brokers margin income forecasts for FY23 and FY24 are 30% and 37% in excess of consensus estimates.

The US mortgage servicing business

Morgan Stanley also sees a return to stronger growth in the US mortgage servicing business with refinancing rates falling. These falling rates support loan balance growth and reduce balance sheet strain from mortgage service rights (MSR) purchases.

MSR’s are intangible assets bought by Computershare, which provide the legal right to service a particular mortgage (for a fee) for the duration of its life. With the combination of rising rates and the ending of forbearance programs, the broker estimates more opportunities will present for non-performing loans (NPL) servicing revenues for the company.

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