Computershare: Huge interest rate leverage comes to the fore

Author name:: By Richard Coles
Job title:: Senior Analyst
Date posted:: 11 November 2022, 8:00 AM
Sectors Covered:: Insurance, Diversified Financials

Computershare (ASX:CPU) has hosted its AGM.
CPU’s FY23 EPS growth guidance has been upgraded to +90% on the pcp, versus the +55% level given at the August result.
We upgrade our CPU FY23F/FY24F EPS by ~20%-35% and our target price rises to (login to view).
With CPU trading at a 30% discount to our target price we maintain our ADD recommendation.

AGM update – key points

CPU’s FY23 EPS growth guidance has been upgraded to +90% on the pcp, versus the +55% level given at the August result.

The upgrade has been driven mainly by the benefits of rising interest rates, with margin income (interest income) now expected to be US$800m for FY23, up from the US$520m guidance given at CPU’s August result.

FY24 margin income guidance has also been given of A$1.0bn.

Management noted how well the Computershare Corporate Trust (CCT) acquisition is performing. This business, which did U$84m of EBITDA in 2020, is now expected to produce US$450m of EBITDA in FY23.

CPU has also identified US$80m of synergies to take out of this business by 2027, which will lower the transaction multiple from 9x originally to 2x.

Key thoughts

This AGM update shows the power of CPU’s leverage to rising interest rates, which has been materially enhanced by the CCT acquisition. The speed with which this leverage is rolling through CPU’s earnings is also impressive, in our view.

The flow through of higher interest rates will drive strong CPU EPS growth over the next two years. However, we do note:

Cash rate assumptions in CPU’s margin income guidance do largely reflect the current forward curve versus being conservative.
Today’s upgrade also reflects faster optimisation of the CCT investment portfolio and better overall capture rates of available market yields than originally expected (90% vs 65%). This means further margin income upside seemingly is largely tied to any faster/higher central bank rate tightening than expected.

The CCT acquisition continues to look like a transformational deal for CPU. This business is now expected to produce a ROIC above 30% in FY23, which is well above the FY22 group level (~13%) and versus an original FY25 target of 15%. This outcome is also before the bulk of the synergies have been realised.

The negative in the update is the reminder that CPU’s EBIT, ex margin income, result will decline in FY23 on lower transaction volumes, events-based activities and higher costs, albeit these impacts are dwarfed by margin income benefits at the bottom line.

Forecast and valuation update

We upgrade our CPU FY23F/FY24F EPS by ~20%-35% and our target price 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 has utilised the Covid-19 downturn to make a seemingly very astute acquisition in CCT.

We expect strong near-term profit results to drive rapid de-gearing and provide balance sheet optionality. We maintain our ADD recommendation.

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