Computershare: Softer than the headline beat suggested

About the author:

Author name:

By Richard Coles

Job title:

Senior Analyst

Date posted:

11 August 2022, 8:00 AM

Sectors Covered:

Insurance, Diversified Financials

• Computershare's (ASX:CPU) FY22 management EPS was +10.6% on the pcp and came in slightly above full year guidance.
• However, we saw this as a mixed result overall. While it beat at the bottom line benefitting from strong margin income and a solid contribution from the Corporate Trust business, 2H22 EBIT ex MI did decline 9% on the pcp (arguably highlighting some compositional weakness). Either way, with FY23 guidance for +55% EPS growth, interest rate leverage appears to trump other concerns near term, in our view.
• We lift our CPU FY23F/FY24F EPS by ~9%-13% reflecting higher margin income assumptions going forward. Our price target rises to (login to view). ADD maintained.

Result detail

CPU’s FY22 management EPS (US58cps) was +10.6% on the pcp and came in slightly above full year guidance (+9% growth). The 2H22 dividend (A30cps) beat our expectations (A28cps), with the payout ratio in-line with 1H22 (77%).

FY22 Management NPAT (US$350m, +23% on pcp) appeared 2% above Bloomberg consensus (US$344m), whilst FY22 group revenue (US$2.6bn, +12% on the pcp) was largely in-line with consensus. 

FY22 EBIT ex Margin Income was ~+2% on the pcp, well below guidance (>13%).

CPU have guided to FY23 management EPS of US90cps, +55% on FY22. This EPS figure was seemingly ~5% above previous Bloomberg consensus.

We saw this as a mixed result overall. While it beat at the bottom line benefitting from strong margin income and a solid contribution from the Corporate Trust business, 2H22 EBIT ex MI did decline 9% on the pcp (arguably highlighting some compositional weakness).

Either way though, with FY23 guidance for +55% EPS growth, interest rate leverage appears to trump other concerns near term.

The good

1. FY22 Margin Income (MI) of US$187m rose 75% on the pcp and doubled in 2H22 on 1H22 (US$125m vs US$62m). FY23 MI guidance of US$520m is 2.7x the FY22 level, highlighting CPU’s substantial interest rate leverage.
2. Corporate Trust (CT) delivered an impressive 2H22 result, producing ~US$260m of revenue and ~US$80m of EBITDA. CT’s 2H22 EBITDA margin (31%) easily bettered the group level (~28%).
3. The Employee Share Plans result was solid with FY22 revenue and EBIT growth of +3% on pcp.
4. The newer growth avenue of Governance Services saw robust FY22 revenue growth (+30% on the pcp).
5. CPU generated substantial FY22 free cashflow (US$322m) which helped to reduce leverage (1.64x) below the bottom end of CPU’s target range (1.75x-2.25x).

The bad

1. 2H22 Management EBIT ex MI growth was down -9% on pcp, versus implied 2H22 guidance of +10% on pcp. The result being impacted by a large 4Q22 drop in transaction/corporate actions activity.
2. FY23 guidance is for EBIT ex MI to decline ~5% on pcp, reflecting a more difficult environment for market-based activities and cost impacts from higher inflation.
3. CPU’s FY22 EPS result did benefit from a lower 2H22 effective tax rate (24% vs 28% in 1H22).
4. Mortgage Services saw another disappointing result (FY22 revenue -7% on the pcp and an EBIT of -A$6.4m), with pressures in the US business remaining, e.g. weaker origination volumes, etc.
5. Business Services Management EBIT (~US$39m) fell 25% on the pcp, affected by soft Bankruptcy and Class Actions activity.

Changes to forecasts

We lift our CPU FY23F/FY24F EPS by ~9%-13% reflecting higher margin income assumptions going forward.

Our PT rises to (login to view).

Investment view

CPU is a quality franchise that has delivered solid returns and consistent growth over time. The company remains well positioned to benefit from rising global interest rates, and initial signs from the Wells Fargo Corporate Trust acquisition remain positive.

With greater than 10% TSR upside on a 12 month view we maintain our ADD recommendation.

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