Should I Buy Computershare 2021? Computershare managed to...

Should I Buy Computershare 2021?

Computershare managed to maintain its dividend despite the COVID recessions. Their fundamentals are largely in line with market standards, and their technical factors look good. We’re considering CPU shares in range, here’s why.

Share Price

Computershare has largely recovered from the COVID crash, which plummeted the share price by over 50%. The current CPU share price is $17.10, which is up 32.71% over the last 12-months. CPU is sitting in the upper end of its 52-week range of 11.75-17.49.

Over the course of ten years CPU shares are up over 94.35%, proving to be a decent holding for long-term investors.

About

CPU provides Issuer Services, Mortgage Services & Property Rental Services, Employee Share Plans and Voucher Services, Business Services, Communication Services, and Utilities and Technology Services. Most shareholders should recognize their brand as the share registry for a large portion of ASX-listed companies.

Dividend History

CPU has paid biannual dividends every year since 1994. This includes the 2008 GFC and COVID recession. CPU shares pays dividends that are either fully franked, 30% franked, or unfranked dividends. The current average yearly dividend for CPU shares is $0.46 giving them a decent yield of 2.69% or a gross yield of 3.45% at the current share price.

Note CPU shares are currently paying out all earnings to shareholders, this is unsustainable. Going forward we expect dividend payments to decrease as CPU targets a sustainable payout ratio closer to 50%.

Fundamental Summary

CPU is the 50th largest ASX listed company. Its PE is greater than the market average of 15-20x. Their PEG also demonstrates poor value. Their ROE is in line with the market average of 11%. CPU has a significant amount of debt at $2.154 billion.

Earnings Guidance Upgrade

CPU has upgraded their Management EPS to be down around 8% (previously down around 11%)

For CPU FY21 expect:

• Management EPS to be down by around 8%
• Management EPS for 2H21 to be around 30.0 cents per share
• EBIT ex Margin Income to be up by around 14%
  Key Assumptions
  › Margin Income revenue expected to be around $105m
  › Equity and interest rate markets remain at current levels / in line with current market
  expectations
  › Group tax rate between 28.0% – 30.0%
  › For constant currency comparisons, FY20 average exchange rates are used to
  translate the FY21 earnings to USD3

Following this they have projected a complete recovering to earnings by 2H21.

Cashflow Statement

From the cash flow statements, we can see receipts from customers have reduced slightly, while payments to suppliers and employees, loan servicing’s and income tax have all increased significantly. This has dramatically impacted the net operating cash flows of the business. We can see the company has significant debt, with high repayments yet managed to pay out 87.6M in dividends to shareholders.

We appreciate the company trying to avoid cutting dividends. But at the height of the recession, almost all companies reduced their dividends to maintain a strong cash position. With CPU’s high debt levels the cash could have been deployed more appropriately to other uses.

Computershare VS Link Market Services: The Duopoly

Link Market Services is the other big player in the ASX share registry space. They are also a listed company under the ticker code ASX: LNK. These have a duopoly over the Australian market commanding an 86.5% market share.

The share registry space works in typically 3 year contracts, and a smaller number of 1-2 year and over 5 year contracts.

In recent years there has been an erosion in market share for market leader Computershare to the benefit of Link Market Services and smaller competitors. In 2016 CPU commanded a 57% market share of the ASX 200, and a combined 96%. Today CPU services 47.4% and the duopoly occupy 86.5%

CPU’s Acquisition Of Wells Fargo Corporate Trust Services

Back in March CPU announced the Acquisition of the assets of Wells Fargo Corporate Trust Services, a leading US based provider of trust and agency services to government and corporate clients

The Acquisition is expected to generate attractive financial returns for shareholders. The purchase price of US$750m represents an EV/LTM EBITDA acquisition multiple of 8.9x (pre synergies). After including stand-up Capex, regulatory capital requirements, and full run-rate synergies it represents an EV/LTM EBITDA acquisition multiple of 5.9x

Based on ongoing organic growth and cost savings, there is a clear pathway to CTS generating a return of over 15% on invested capital by FY252F.

In order to fund this acquisition CPU undertook a major capital raising in march.

The Institutional Entitlement Offer raised approximately A$500 million at the offer price of A$13.55 per new share. They also conducted a retail raise. The retail component of the Entitlement Offer is expected to raise A$335 million taking the expected size of Computershare’s total equity raising to approximately A$835 million.

Prophet’s Take

Computershare has an excellent synergy of businesses, with their added acquisition in the Wells Fargo deal we should see some excellent growth from CPU shares over the next five years. They are also expected to be return earnings to Pre-COVID levels in the second half of the year.

At the time of writing, we don’t see the companies fundamental as anything to be excited about. They also have a large amount of poorly serviced debt and have chosen to pay a dividend whilst simultaneously increasing debt and raising capital. We believe that CPU’s share price is currently in-Range for the next 12months.

Full Analysis if interested: disallowed link/should-i-buy-computershare

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