BUY HOLD SELL – Computershare (ASX: CPU)Computershare (CPU) is a business that offers corporate trust, stock transfer and employee share plan services in a number of different countries. Most of its earnings come from operations outside Australia with the US its biggest contributor. Aside from fees for its services, CPU generates a large portion of its earnings from interest on client-owned cash balances (margin income) – which is a fairly defensive revenue stream. The stock recently finished down almost 5% on its results despite management EPS and management profit both coming in ahead of consensus and guidance. There was a high bar to reach given the upgraded guidance in February, which was reaffirmed in May and the share price appreciation since then. Disappointment flowed from what some labelled a low-quality earnings beat as the result relied on a lower tax rate and higher margin income. A final dividend of 30c was declared, reflecting a 30% increase on last year. Guidance, which outpaced consensus, was considered conservative. CPU expects management EPS to increase by ~55% in FY23. Added while inflationary pressures are impacting its operations, margin income, estimated to be around $520m this year is anticipated to drive strong earnings growth. Brokers remain bullish, with the average target implying an upside of more than 22%. Citi upgraded to BUY following results citing benefit from further increases in margin income, which is influenced by higher interest rates. UBS said FY23 guidance was ahead of expectations. Calculated every 50bp rise in the US cash rate adds $100m to its FY23 forecast and 13% to EPS. Currently, interest rates in the US are 2.25-2.5%, with expectations for it to reach 4% in 2023. The implication is that there is more upside to come. Macquarie said margins, costs and leverage all impressed as the company enjoyed the harvest of rising interest rates. The share price has topped out and is back to the bottom of its trading range. RSI just holding above oversold territory. The 2300c level has been a support level in previous months, which it has just broken through. If you blur your eyes, you can tell, in the medium term, Computershare is a bottom left to top right performer.
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- Corporate Actions volumes are anticipated to be lower
- Employee Share Plans transaction volumes to remain volatile
- Cost pressures across all our business lines
- Mortgage origination volumes subdued
- Timing and extent of rate rises may differ to assumptions
- Significant growth in margin income, driven by global rising rates
- Full-year contribution of Computershare Corporate Trust (acquired from Wells Fargo), including delivery of year 2 expected synergies and improved Money Market Fund fees
- Growing contribution from Governance Services businesses
- 2H Recovery in Bankruptcy volumes
- Ongoing focus on cost-out