One of the stock picks for this week is Computershare (CPU), a share registry company which takes care of shareholder communications and records for other companies. After a disappointing outlook, CPU may be one of the shares to sell on the ASX.
It is the dominant player in the Australian market, and has managed to export its successful model overseas to become the world’s largest and leading provider of investor services.
The global economic downturn saw M&A activity slowing down at a time when CPU was also suffering from low interest rates.
CPU managed to turn it around in 2009 and early 2010 as acquisitions continued, interest rates rose and the market for IPOs improved.
CPU today reported its FY10 results, which were respectable (including EPS growth of 11% on FY09 and revenue growth of 7%), but forecast EPS to be 5% to 10% lower in FY11.
The guidance hints to short-term challenges for CPU, which saw a fall-off in activity from 1H10 to 2H10.
However, CPU traditionally gives very conservative initial guidance, and this forecast is primarily based on forecast activity in the next few months alone, discounting the chance for a pick-up in activity towards the end of the year.
Famous For Acquisitions
CPU has grown significantly since July 2007, as it has taken on a large number of big acquisitions.
These include the US$17.6 million acquisition of Ireland’s Datacare, the US$33.4 million takeover of the US’s Administar, the US$92.3 million acquisition of Germany’s VEM, the US$142.6 million takeover of Australia’s QMT Communication Services, and the US$175 million takeover of UK Voucher administration business Busy Bees.
CPU has seen the benefit of acquisitions in its 2009 results, with strong contributions from Voucher Services (formerly Busybees) and KCC evident.
The company is focused on one of its most recent major acquisitions – HBOS Employee Equity Solutions, which it is purchasing from Lloyds Banking Group.
The acquisition is expected to be EPS positive in FY11, and increasingly accretive thereafter.
Flat Rates Dampen Income
When the global economic downturn resulted in Aussie interest rates being cut to a mere 3%, this was a negative for CPU. After all, global interest rates are a major factor in CPU’s direct income – around 35% of margin income funds under management are exposed to rate movements.
The Reserve Bank has raised rates a few times over late 2009 and early 2010, but in the last few months the pace has slowed down.
The RBA has elected over its last few meetings to leave the cash rate unchanged at 4.5 per cent, including its most recent 3 August meeting.
The central bank stated that underlying inflation was within its target range and the global economic outlook was more uncertain, therefore there was little need to tighten monetary policy further.
Unfortunately, a lack of rate increases is negative for CPU. In the long-term, however, the RBA is slated to lift rates as the current rate is low on a relative historical basis.
Nice Year, Poor Outlook
CPU today reported its FY10 results, including earnings per share (EPS) for FY10 of 57.80 cents, up 10.9% on FY09.
Underlying earnings grew 7.4% on year whilst net profit after tax (NPAT) climbed 10.9% on the prior year.
Revenue was up 7.1% to $1.62 billion whilst operating cash flows grew 21.4% to $414.5 million.
The results were fairly decent, and in-line with expectations, though unfortunately operating expenses grew 7.3% on FY09, impacted along with all financial metrics by a generally weaker US dollar.
CPU declared a final dividend of 14 cents, up 3 cents on the prior year.
Management noted the year was largely a tale of two halves, with the second half of the year failing to achieve the business volume heights of 1H10.
CPU attributed this to the levels of corporate action activity in Hong Kong, India, and Australia failing to continue strongly into the 2H10.
The group disappointed the market by announcing that EPS will be 5% to 10% lower in FY11 in the absence of a pick-up in transactional opportunities or a material acquisition.
Outlook
Though CPU reported decent FY10 results today, the outlook has caused many market-watchers to worry.
CPU noted a slowdown in activity in its 2H10 and expects that matching its FY10 EPS result in the coming year will be difficult.
CPU now expects EPS to be 5% to 10% lower in FY11, which is below analysts’ expectations for a flattish to 8% EPS growth result.
The outlook certainly confirms CPU will face challenges in the year ahead. However, the long-term picture is not so dire, and even the short-term challenges may prove less difficult than CPU has forecast.
This is because the company tends to give very conservative initial guidance. CPU has looked to its pipeline of activity over the next few months as a basis, and has not accounted for a potential pick-up in activity over the year – which has every possibility of eventuating.
Recent decisions by the RBA to keep interest rates on hold are to the detriment of CPU, and whilst rates may remain flat in the short-term we should see a rise in the long-term.
CPU has noted that cost management remains a key focus going into the coming year, which is important considering operating expenses grew 7.3% in FY10.
Australian share price for CPU has struggled as of late since the beginning of April 2010. On the 11th August, the share price slumped over 10% following its FY results.
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Computershare (ASX: CPU) provides technology systems and services for the international securities industry. Its core services comprise the provision of shareholder registry services, employee share plans and associated services such as printing and share registry analytical services.
