Australia | Nov 15 2017
Computershare has upgraded guidance, attributing a lift in performance to a stronger contribution from corporate actions in mortgage services. Brokers have taken this in their stride.
-Supported by potential for US tax cuts and tailwinds from rate rises in the northern hemisphere
-Several brokers consider the stock's premium to the market difficult to justify
-Discrepancy with DealLogic market data
By Eva Brocklehurst
Computershare ((CPU)) has confirmed the suspicions of several brokers that original guidance provided at the FY17 result was conservative. Four months into the first half, the company now expects management earnings will be up 10% in constant currency terms. This compares with prior guidance of 7.5%. The lift in performance is attributed to stronger contributions from corporate actions and mortgage services.
UBS believes the company is executing well and its cost reduction programs and capital management are all delivering, as macro tailwinds from rate rises in the northern hemisphere also begin to emerge. Nevertheless, growth prospects in the medium term are expected to be more modest as these drivers fade.
Initial guidance was always likely to be conservative, Morgans suggests, given benefits from cost reductions and recent acquisitions that flowed into FY18. The broker notes commentary regarding a good start for corporate actions activity is similar to that of peer Link Administration ((LNK)).
Morgans likes the fact management is taking a cautious approach to setting expectations after a long period where downside risk were underestimated. That said, the broker believes the stock is now closer to fair value and maintains a Hold rating.
CLSA was expecting guidance to be upgraded at the first half result but coming earlier than expected, confidence in the underlying momentum of the business has improved. The broker still suspects the company is maintaining a conservative outlook, with further leverage to increases in global interest rates and potential for US tax reform. CLSA, not one of the eight stockbrokers monitored daily on the FNArena database, has an Outperform rating and $17.25 target.
The company has indicated it will be unlikely to buy back shares between January 1 and the payment of the interim dividend in mid March 2018. Computershare will then state the full value of franking credits that are available. Cost reductions are on track with a US$42m cumulative run rate expected by the end of FY18.
Hence, Citi envisages significant upside from further cost reductions, but does not yet allow for this in forecasts. The broker believes that the rally since the company's FY17 result has already incorporated the potential for further upside from US tax cuts and higher interest rates.
Ord Minnett defends the latest guidance, believing it is being driven by the outcome of the first four months of FY18 as opposed to any changes to underlying assumptions. Trends are encouraging and the broker agrees there is potential from an uptick in global interest rates, possible change in US tax rates, and accretive acquisitions.
While the company has experienced stronger contributions from corporate actions, using DealLogic data to measure this activity, Deutsche Bank finds activity is down -36% in the company's core markets. To some extent, the broker considers the discrepancy could be explained by some FY17 transactions closing into the first quarter of FY18, and favourable outcomes for clients of Computershare in the deals that have occurred.
Overall, Deutsche Bank retains a cautious stance, given a weak pipeline of deals to be completed over the next six months. The broker retains a Sell rating, with a view that mortgage servicing margins are likely to disappoint over the medium term.
UBS also finds corporate actions revenue at odds with industry data but notes the monthly average value of deals over the first four months of the first half is up 8% versus a particularly weak prior second half period.
In analysing the data Macquarie notes that IPO and M&A activity in recent months was subdued, which signals that while corporate actions revenue improved, mortgage services was the larger contributor to the company's upgrade.
In mortgage servicing the company expects to generate a 20% pre-tax margin and a 12-14% post-tax cash flow return. Deutsche Bank believes the operating leverage in this business is significantly lower than the guidance. The broker is forecasting 7% pre-tax margins at scale for this division. This margin assumption explains the bulk of the broker's difference with consensus forecasts over the medium term.
Macquarie suspects margin income has supported earnings in recent months and would have provided the additional confidence to upgrade. Still the broker considers the current premium to the market is difficult to justify in the absence of further upgrades.
FNArena's database shows one Buy (Credit Suisse, yet to comment on the update), five Hold and two Sell ratings. The consensus target is $14.28, signalling -10.9% downside to the last share price. This compares with $13.89 ahead of the update. Targets range from $11.50 (Morgan Stanley, yet to comment on the update) to $16.00 (Citi).
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