Cloudy Outlook For Computershare

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Computershare will move its registry and mortgage servicing business to a global structure and has outlined expansion opportunities, although brokers suspect growth in FY20 will be difficult.

-Delays in UK mortgage service merger add to uncertain outlook
-Interest-rate movements are unlikely to provide support
-Equatex synergies reaffirmed
 

By Eva Brocklehurst

Computershare ((CPU)) has outlined a strategy for growth but brokers suggest a lot remains to be done to achieve its plans. The company will move to a global structure and away from its regional approach to running the business.

Computershare has reiterated guidance for FY19 management earnings growth of around 12.5% but, brokers contend, in the absence of a broader-based pick up in revenue and/or rises in interest rates, growth in FY20 is likely to be difficult.

Macquarie found the articulation of growth opportunities helpful and encouraging although expects it will take several years before these contribute meaningfully to growth. Macro tailwinds have abated, which, in the broker's opinion, limits re-rating potential.

Credit Suisse suggests, as the balance sheet is strong, some capital could be deployed in coming months to accelerate the expansion. Yet, while value is again emerging in the stock the broker remains hesitant to re-rate because of uncertainty over the near-term outlook.

Just as the interest rate environment has turned against the company, its IT integration in the UK has also muddied the water and, while the company is now more optimistic about growth in the registry (issuer) business from adjacencies, this appears to Citi to be a long-dated strategy that will take time to have an impact.

Interest-rate movements are unlikely to provide much of a boost to margin income and, while help could come via an acquisition, the broker points out asset prices are relatively high. Moreover, with a mixed track record in this regard, Citi suggests investors are likely hoping the company proceeds with care.

UBS believes strategic benefits from switching to product-based management from a regional focus are increasingly evident. Issuer services have a clearer and more consistent strategy to expand beyond the core registry and corporate action offerings into higher-growth governance and compliance support services.

Meanwhile, management believes it is approaching scale in US mortgage servicing, targeting 20% pre-tax profit margins and 12-14% return on invested capital in FY20.

UK

The company has completed its platform development for merging the UK Asset Resolution (UKAR) but delays have left stranded costs of US$35m for an extra year. Revenue is being booked in FY19 at above the original rate but will drop sharply in FY20 and FY21 to zero.

Ord Minnett assesses that the profit contribution from fixed fees in FY19, that will no longer apply, is more than previously expected and this will require some meaningful cost savings to offset. The company is seeking an additional US$50m in cost offsets in mortgage servicing over three years in order to retain profits.

Macquarie believes consensus expectations were too optimistic on both margin income and UK mortgage services. As the stock has underperformed the ASX 200 by -9.1% the broker's rating is move back to Neutral from Underperform.

Headwinds in the UK have overshadowed a stronger story in the US, UBS points out. As the execution risks around cost reduction targets are not insignificant, and there is better strategic growth prospects emerging elsewhere, the broker also opts for a Neutral rating.

Equatex

Equatex, meanwhile, is tracking well, with a US$30m target for cost synergies being reaffirmed. The company points to client feedback about its new offering, noting a willingness to purchase more product. As employee share plans will move to a global management model in future, Morgans suggests this should provide benefits in terms of leverage, speed to market and service quality.

FNArena's database shows seven Hold ratings and one Sell (Morgan Stanley, yet to comment on the briefing). The consensus target is $17.10, signalling 2.9% upside to the last share price.

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