Computershare poised

When BHP announced it wanted to merge with Rio Tinto, Computershare chief executive Stuart Crosby and chairman Chris Morris would have both broken out into broad smiles. Computershare operates the share registers of companies.

These multi-country transactions are what an upbeat Crosby describes as “sweet spots”.

As companies become more global so more will require an international share registry service. Computershare is ready and waiting for them.

Computershare is one of my favourite companies because I watched Morris and his people convert share registry discards from large accountancy firms into a dynamic global business.

No one had done this before so there were plenty of wrong turns along the way, and Morris learned from each one.

Now Computershare is a business that uses as its core competency an ability to process and administer information. This enables it to bolt on many acquisitions and it has become expert in the process.

Seven companies were bought in 2006-07 for an outlay of $100 million. Most of them contributed to the 61% rise in the earnings per share over the term. So far in 2007-08 four companies have been bought for a total of $70 million, and all are designed to lift earnings per share this year or next.

The ability to bolt on acquisitions was the great driver of GE when Jack Welch was chief executive. Later, the company went over the top and Welch’s successor, Jeff Immelt, has been working very hard to get the company back on track.

But at this stage of Computershare’s development, being able to bolt on acquisitions anywhere around the world is a tremendous opportunity because the companies are normally bought on a lower price/earnings multiple than Computershare. The profits are then boosted as a result of being incorporated in the Computershare systems and marketing.

The past two years at Computershare have been as good as it gets. After lifting profits 61% in 2006-07, the company is now forecasting a further 30% rise in the current financial year. But beware. Computershare generates 57% of its EBITA in North America and states its results in US dollars.

So the Australian, Asian and European operations actually increase their contribution to the announced profits as a result of the US dollar devaluation.

In Australian currency, Computershare earned 41¢ in 2006-07 and is forecasting about 53 Australian cents in the current year based on a US90¢ Australian dollar.

Along with the global takeover activity, Computershare is also winning on the IPOs out of Hong Kong.

But Computershare is about to be tested. The US economic slowdown and the sharp reduction in private equity driven takeovers will restrict profits.

Many institutions are suggesting Computershare’s 2008-09 earnings will show very little growth and although 2009-10 may see a 12–15% rise, the predictions come with nervousness. Accordingly, fears about the US sharemarket and the reduction in takeover activity, along with the fall in the US dollar, have held back the performance of Computershare stock in recent months.

But the tougher times in the US will cause new acquisition opportunities to emerge and the company may come through this period in a much stronger position. Given that its price/earnings multiple is about 19 times expected current year Australian dollar earnings (based on a US90¢ exchange rate) the stock is not cheap. But its international network is both unique and irreplaceable.

Morris and his shareholder supporters are not sellers but if ever they change his mind then there would be a rush to buy the company because it’s a perfect fit for a great many enterprises.

If the pace of mergers eases a little while North America gets through its banking crisis, you can be sure that it will pick up again which makes Computershare an important component of any long-term Australian share portfolio and there are no significant global opponents.