Should I Buy Computershare? 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.
Computershare Share Price
Computershare has largely recovered from the COVID crash, which caused the share price to plummeted 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 Shares ASX
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.
The company was founded in 1978 and is based in Melbourne, Australia.
Computershare was listed on the Australian Securities Exchange in 1994 with a market cap of AUD $36 million, managed around 6 million shareholder accounts and had about 50 staff. They are now a large-cap company managing over 75 million customer records with 12,000 staff across all major financial markets.
Should I Buy Computershare: Dividend History
CPU shares typically announce a dividend with the release of its half-yearly results in February and full-year results in August as seen in their financial calendar. Dividends are typically paid twice a year, in March (interim dividend) and September (final dividend).
CPU has paid biannual dividends every year since 1994. This includes the 2008 GFC and COVID recession. CPU shares pay 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%.
After surveying 110 Investors about their current CPU shares sentiment: BUY-HOLD-SELL, as well as their target price over the next 12-months here are the results;
The results from this survey show there is currently no strong investor sentiment on CPU shares. So how much are CPU shares worth? Let’s get into it.
|Volume 4W Avg||1,646,984|
|NTA per Share||-3.96|
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.
In February Computershare released its half-yearly results. They concluded that their business performance was ahead of plan, their dividend was maintained, and offered a full-year guidance upgrade. Although, interest rates impact their earnings.
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%
› Margin Income revenue expected to be around $105m
› Equity and interest rate markets remain at current levels / in line with current market
› 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 recovery to earnings by 2H21.
We can see that the revenues of Computershare have remained relatively stagnant. Meanwhile, we see an increase in expenses, namely direct services from the cost of business expenses. As a result, the bottom line profits were reduced from the previous period. Profit for the Half-year attributed to shareholders is $72,552,000.
Again the companies balance sheet has also remained stagnant between the two periods. We can see the cash and Cash Equivalents have reduced slightly to $592,411,000. Overall total assets have slightly increased to $5.1B (up around 2%). Total liabilities have also increased to 3.5B. Overall net assets are 1.6B, which is up 2.3%.
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.
In summary, the upside is likely to prevail as long as $16.4 is support. The alternative scenario is that a downside breakout of $16.4 would call for $15.7 and $15.2.
Here’s A Breakdown Of The Detailed Technical Factors;
Insider Ownership and Trading
CPU has decent insider ownership for a large-cap company, at 5.3%. A large proportion of the company is owned by the general public, and institutions at 53.8% and 39.8% ownership respectively. Public and private companies own 0.2% and 0.9% of Computershare.
Chris Morris is the founder and significant insider owner of CPU.
|Name||Total Shares||Shares Held (%)|
|State Street Corp.||30,253,648||5.01%|
There has been no individual insider trading in 2021. However there have been institutional placements that have seen the total number of outstanding shares increase by over 11% in the past year, this has caused shareholder dilution.
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%
Low-interest rates have and will continue the margin income of CPU. Their current earnings guidance shows blue-skies ahead as they have forecasted on earnings jump to pre-COVID level for the second half of the year.
Their Issuer services, which is also their core business have delivered fast-growing results for the group. This has been supported by new client wins, increasing market share, and growth in our entity management offering. We can see this creating material revenue gains for the company. Their strong synergy of services will allow them to capitalize on this growth well.
We would like to see the company pay down debt and focus on capital growth by reinvesting in the company. We see the current dividend payouts as unsustainable and may hinder the company long-term. However, we can see them reducing their payout ratio to a more sustainable 50% over the next few years.
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.
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 company’s fundamentals 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.
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