Australia | Nov 12 2020
This story features COMPUTERSHARE LIMITED. For more info SHARE ANALYSIS: CPU
Computershare's first quarter update received mixed responses, with several issues required to pan out positively to achieve FY21 guidance.
-US shareholder paid fees expected to pick up in the second half
-Concerns regarding another series of lockdowns
-Delinquent loans servicing more of a medium-term opportunity
By Eva Brocklehurst
Volatile items such as strong growth in corporate actions have helped Computershare ((CPU)) perform in the first quarter but it appears a lot needs to fall into place to achieve FY21 guidance.
The company's AGM provided no upgrade to guidance, although the traditional ratio skew to the second half was pegged back a little to 42:58 from 40:60, reaffirming embedded views regarding the outlook.
On balance, Morgan Stanley found the update positive, supporting its view that earnings per share (EPS) can beat guidance. New client wins in issuer services are ahead of expectations, which the broker asserts is a recurring benefit.
Yet Citi assesses the year ahead will be challenging, with a number of unavoidable headwinds likely to crystallise. While guidance remains plausible it requires a very strong second half and perfect delivery on cost reductions.
Computershare has signalled management EPS is likely to be down around -11% and ex-margin income up around 10%. Margin income is on track for US$100m in FY21. It appears to Morgans the year has started in a positive way, and while the lack of any upgrade could be construed as negative this could just be Computershare taking a conservative stance.
Goldman Sachs agrees many aspects of guidance are tracking to plan, particularly margin income. Those segments that are in line with expectations include corporate actions, share plans and issuer services.
While shareholder paid fees in the US were weak to start the year, the company envisages an opportunity for this to pick up into the second half. This weakness, Goldman Sachs notes, comes despite a market rally that has been skewed towards the tech sector.
Computershare has raised some concerns regarding another series of lockdowns in many of its key regions, which is largely related to the extension of the US mortgage foreclosure moratorium. The extension of the restriction on foreclosures to December 31, 2020 has postponed some mortgage servicing ancillary revenue into the second half.
This is the most obvious risk to the short-term, in Goldman Sachs' view, although the extent to which delivery of a coronavirus vaccine builds corporate confidence should help even out the risks.
Ord Minnett agrees Computershare may benefit from market confidence in a vaccine, given the business suffered sharply at the onset of the pandemic. Yet much of that early pressure came from lower interest rates and problems with mortgage servicing, neither of which appears to be improving in the short term.
Citi suspects the second half is still including stretched targets and the extension of the US foreclosure restrictions makes targets even harder to achieve. The broker also envisages a risk that the boost from delinquent mortgage servicing in FY22 may not be as strong as previously expected.
Delinquent servicing is hard to predict but it appears the level of delinquent loans will rise in the US in the third quarter. This should provide relatively lucrative sub-servicing opportunities but Citi asserts this is likely to be more of a medium-term opportunity. Hence, the broker cuts EPS estimates by -3% for FY22 and FY23.
In addition, excluding the impact of margin income, underlying earnings in the second half need to rise 45% to meet guidance. While understandably this will be cycling the comparison with the outbreak of the pandemic, and may be helped by a recovery in US shareholder paid fees, Citi still envisages the targets difficult to achieve.
Improved corporate actions in Hong Kong and capital raisings in the UK were the main source of the better-than-expected performance in the first quarter. Citi acknowledges this is helpful but believes corporate actions are less of a swing factor than the market would like to believe.
Ord Minnett agrees that despite a reduced seasonal skew to the second half and the company's assertion that trends over the first four months are running slightly ahead of budget, guidance remains difficult to achieve.
Historically, the company has struggled to grow EPS excluding margin income and guidance implies growth in this aspect in the second half of 33%. The broker accepts there are higher corporate actions in the UK and Hong Kong and higher trading volumes in share plans, along with the client wins and issuer services, yet the revenue from US foreclosures is expected to remain weak.
Overall, CLSA acknowledges Computershare could be under-promising and there are growth opportunities in corporate actions, share plans revenue and US issuer services. Still, the broker considers the valuation stretched and, not one of the seven stockbrokers monitored daily on the FNArena database, reiterates an Underperform rating with a target of $13.30.
At the other end of the spectrum, Goldman Sachs, also not one of the seven, retains a Buy rating with a $14.42 target. The database has three Buy ratings, two Hold and two Sell. The consensus target is $13.43, signalling -5.3% downside to the last share price. Targets range from $10.75 (Ord Minnett) to $15.75 (Morgan Stanley).
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