Computershare (CPU) – Volatile times

Computershare provides issuer, corporate trust, employee share plans and voucher, communication and utilities, technology and operations, and mortgage and property rental services. The company operates in Asia, Australia, New Zealand, Canada, Continental Europe, the UK, the Channel Islands, Ireland, Africa, and the US. Computershare was incorporated in 1978 and is based in Melbourne.

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Ord Minnett has reviewed its investment thesis for Computershare in light of the Middle East war and the subsequent boost to inflation expectations and bond yields, noting the share registry and portfolio administration group typically makes more than 60% of its group earnings before interest and tax (EBIT) from margin income on its client balances. Interest rates are a swing factor for Computershare via the interest it earns through client balances, so rising rates boost earnings for the company. We note, however, that Computershare has hedged almost half of its exposure, which means only 1/3 of its client balances have a direct exposure to interest rates. Based on the bond market’s current pricing, the curve is pricing in a weighted average cash rate around 50 basis points (bp) above market expectations. Ceteris paribus, this would equate to an EPS boost in FY27 of 4–5%.

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The flipside is the negative impact rising interest rates have on the company’s operating earnings, with almost 1/3 of revenue coming from transaction and event-driven fee income, which would typically fall as higher rates increase the risk of recession or reduced economic activity. Such weakness was apparent in FY22 and FY23 years as central banks tightened monetary policy.  The other key negative is that client balances will typically stop growing or decline in periods of rising rates and/or economic and geopolitical uncertainty. The market is currently factoring in growth of US$500 million ($715 million) per annum in interest rate-exposed client balances over the forecast horizon. Should client balances just stay steady, then the 4–5% boost to EPS from higher rates would be reduced by about half, while if client balances actually fell, then the impact would more than offset the boost from higher interest rates.

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We have made no changes to our EPS estimates at this stage but note that downside risks to near-term earnings have increased significantly even as higher interest rates should benefit the medium-term outlook. There is apparent value in Computershare but the risks around the near-term outlook in an unstable geopolitical and economic environment lead us to cut our recommendation to Hold from Accumulate. Our target prices remain at $36.75.