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Treasure Chest: Computershare Softening

Treasure Chest | Apr 08 2019

FNArena's Treasure Chest reports on money making ideas from stockbrokers and other experts. Markets have started to price in a weaker trajectory for global interest rates and several brokers believe this is key to reassessing Computershare.

-Corporate activity is ebbing and M&A is down across all major regions
-Official rate cuts now considered more likely than increases
-Limited profit growth envisaged by UBS for 2020-23


By Eva Brocklehurst

Computershare ((CPU)) is at the mercy of softening global bond yields and several brokers have reviewed their forecasts to the downside. The market, over recent months, has started to price in a weaker trajectory for interest rates and this is construed as a key determinant for reassessing the stock.

Corporate activity is ebbing and the number of acquisitions or mergers being completed is down across all major regions in the first three months of 2019, Morgan Stanley observes.

Revenue from corporate actions is likely to be flat or modestly lower in the second half and the broker considers the stock highly cyclical, heavily reliant on transaction fees. Hence, it is trading on multiples that will not be sustained throughout the cycle.

This is one of several reasons why Morgan Stanley believes investment income expectations are too high. Macquarie also reviews the stock, noting that dovish central banks are signalling margin income growth may ease and downgrading Computershare to Underperform from Neutral.

More subdued income, less benefit from cost reductions and a step down in fixed fee revenue in the UK mean the broker calculates a -1% decline in FY21 management earnings.

Stable yields are expected going forward and, looking at current futures markets, this implies downside risk to expectations, with Macquarie expecting a reduced Fed funds rate in the US by the end of the year. The Reserve Bank of Australia now appears to be contemplating reductions to official cash rates. Brexit is unresolved and another dampener on the stock.

Earnings Sensitivity

Computershare's earnings sensitivity is currently around 5% of earnings for every 25 basis points in yields, Macquarie points out. With around 50% of exposed balances in US dollars a rate cut (25 bps) would mean a -2.5% reduction to forecasts. Yet, Macquarie assesses consensus estimates are yet to factor in the impact of lower yields.

UBS agrees interest-rate leverage and cost reductions have run their course and earnings are now increasingly dependent on growth in mortgage services, which has slipped. Mortgage services are expected to rebound strongly over 2019 but this may be short lived.

UBS now expects moderate, rather than material, upside to valuation. The company has distinct growth plans for its UK and US mortgage services businesses but  the broker questions UK profitability once the fixed fees roll off in FY21 and argues there is less leverage from the remaining US upscaling. Hence, the broker envisages limited profit growth in the years 2020-23.

FNArena's database shows three Sell ratings and five Hold. The consensus target is $17.91, suggesting 4.3% upside to the last share price. Targets range from $14.50 (Morgan Stanley) to $20.80 (Citi).

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