Computershare: A flat FY22, before stronger growth in FY23

About the author:

Richard Coles
Author name:
By Richard Coles
Job title:
Senior Analyst
Date posted:
12 August 2021, 7:00 AM
Sectors Covered:
Insurance, Diversified Financials

  • FY21 management NPAT (US$284m) was down ~7.5% on pcp, but broadly in-line with Bloomberg Consensus (US$281m) and company guidance (-8%).
  • We think the CPU result can be summarised as: strong performances in the Issuer Services and Employee Share Plans businesses, offset by weaker results in Mortgage Services and Business Services. FY22 EPS guidance was slightly lower than we expected.
  • We downgrade FY22F/FY23F EPS by ~2% on slightly more conservative growth assumptions in future years. Our target price (login to view) remains largely unchanged.
  • CPU is a quality franchise but we see it as fair value trading on ~24x FY22F PE.

The result summary

FY21 management NPAT (US$284m) was down ~7.5% on pcp, but broadly in-line with Bloomberg Consensus (US$281m) and company guidance (-8%).

The FY21 Management EBIT (ex Margin Income (MI)) of US$336m (+~12.6% on pcp) was slightly below guidance (+14%) due to higher annual leave provisions tied to COVID. FY22 guidance is for 2% EPS growth, with 4% CPU organic growth offset by a ~2% dilution impact from the CCT acquisition and rights issue.

We think the CPU result can be summarised as strong performances in the Issuer Services and Employee Share Plans (ESP) businesses, offset by weaker results in Mortgage Services and Business Services. Whilst it is difficult to know to what level the CCT acquisition was factored into consensus, we saw FY22 guidance as a low-to-mid single digit downgrade to market expectations.

The good

A strong Issuer Services result with 9% revenue growth on pcp, with EBIT ex MI up 26% on the pcp (margin 24.4%, +240bps on the pcp). We note the key Registry business grew revenue ~3% assisted by 277 net new client wins (FY20 195), while the newer Governance Services business broadly doubled revenue to US$74m.

The ESP business performance was a standout, with 6% revenue growth and EBIT ex MI of US$69m (+68% on pcp). The result benefited from 7% new client wins and transactional activity recovering to above pre-pandemic levels in 2H21.

BAU opex fell 6% in FY21 mainly benefitting from the cost out program. CPU has also lifted the expected benefits from its cost out plan by US$30m to US$276m.

MI guidance from the legacy CPU business in FY22 has been upgraded to US$107m (previously US$80m). This reflects the extension of CPU’s Deposit Protection Scheme contract in the UK (until 2026) providing greater investment flexibility, together with an improved US rate outlook (medium term swap rates up since the half).

The bad

Although well flagged, Mortgage Services produced a disappointing EBIT ex MI result of -US$4.2m (-0.7% margin) impacted by a range of factors, e.g. elevated run-off due to lower interest rates, pandemic restrictions on foreclosures.

Business Services revenue (US$207m) was down 15% on pcp, and EBIT ex MI (US$20m) was down 34% on pcp. This reflected stimulus activity delaying bankruptcies and low levels of class actions coming through the courts. 

Free cash flow of US$260m (ex SLS advances) was well down on pcp (US$506m) on lower cash receipts.

Guidance to us looked a low-to-mid single digit downgrade to consensus.

Changes to forecasts

We downgrade FY22F/FY23F EPS by ~2% on slightly more conservative growth assumptions in future years. Our PT (login to view) is largely unchanged with our earnings changes offset by a valuation roll-forward.

Investment view

CPU is a quality franchise that has delivered solid returns (ROIC ~15%) and consistent growth over time. CPU also appears well positioned to benefit from an inevitable future rise in global bond yields, with a 1% increase in interest rates lifting group EPS by ~50%.

However, following a strong rally in its share price over the last year, and now trading on 24x FY22F PE, we see CPU as fair value. HOLD.

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