Reinventing Computershare

Computershare is one of the least known '” and certainly least understood '” of Australia’s new crop of multinational companies. Tagged as a "technology company" in the late 1990s, it paid a high price for its association with boom-time IT stocks when the market slumped in 2000. Since a dramatic recovery more than a year ago, Computershare is now struggling to shake off another tag: that of "share registry company".

Managing director Chris Morris believes the recent acquisition of two large US shareholder service companies '” Georgeson Shareholder and EquiServe '” has reinvented Computershare as a company that makes money our of shareholders rather than sharemarkets. In other words, Computershare now captures values from shareholders (and unit holders in unit trusts) on many levels. On this basis, the company should be a more reliable earner for long-term investors.

Computershare is also one of those rare Top 200 stocks that ranks as a financial services company without being a bank. One of its important profit drivers is the interest the company collects on the vast amount of money it holds in trust for shareholders all over the world; there was $US4 billion held in trust last year.

With its global rivals, Mellon Bank and Bank of New York, firmly established on US stockmarket multiples, it’s no surprise Computershare is an expensive stock The current price/earnings multiple is a very pricey 35 times; for long-term investors the compensation for that rating is Morris’s targeted growth of 20% per annum in earnings per share over the next five years.

After spending most of his working life attached to Computershare (he started working there in 1978, becoming managing director in 1990), Morris personifies the no-frills nature of this highly repetitive transaction-based business, where marketing is less important than the execution of client orders.

A straight-talking executive working in an open-necked white shirt and wary of any hype surrounding his business, Morris is not the easiest executive to interview but he has an enviable track record of fulfilling long-term strategies.

BULL RUN
	2004	2005	2006 (est)
Sales ($m)	871	1,063	1,500
Net Profit ($m)	80	101	141
Dividend Yield (%)	2.69	2.21	2.32
Franking (%)	100	15	n/a
PER (relative to ASX**)	1.5	1.8	2.0
** Assume PER of ASX is on average 15x

Outside of the sharemarket, Morris is a well known figure in the property market. Among the notable assets that have cropped up his portfolio is an island in Western Port, south-east of Melbourne. Last year, he bought an apartment in a newly refurbished block on Melbourne’s Beaconsfield Parade and enjoyed the views so much he want back a few weeks later and bought three more apartments in the same building.

More recently, with substantial revenues from the United States and a revived attempt to improve profitability in Britain, Morris is less seen in Australia, but Eureka Report caught up with him during his most recent visit to the company’s headquarters in Abbotsford, an inner-Melbourne suburb.

James Kirby: Many investors believe your income is dependent on the level of activity in the sharemarkets. Could you explain to Eureka Report subscribers where Computershare's main revenue flows come from?

Chris Morris: That's a mistaken impression. Probably 50% of our income is still sharholder services '¦ but the income relates to a per-shareholder basis rather than how many shares are traded, so even if the market activity decreases you still keep the same number of shareholders. Obviously, corporate actions and stuff like that does affect us, but I think that’s been totally overplayed.

I assume that you’re attempting all the time to lessen dependence on any volatility in financial markets or in equity market activity.

Well I think just because we are diversifying geographically and in product range then it does lessen the impact of equity markets; but probably going back to your first point, I think it has been over-emphasised.

And one part of your income that people are beginning to understand more and more, is that you have this income flow called margin income, which is related to the amount of cash you have in trust at any given time from shareholders sending in cheques for rights issues and that sort of thing.

Cash in hand, yes. Interest rates probably have more effect on our profitability than market activity.

And interest rates have been rising, especially in the US. Is that useful to you?

Well high interest rates mean more market income. Absolutely.

Do you think retail investors are aware of that aspect, the way Computershare is a bit like a bank with cash on deposit?

I’m not really sure, but we do give very clear indications of what that is, especially in all our financial reporting and everything else.

For instance, is that classified as non-traditional income? Is that how you classify it?

Well it’s not really because a lot of the pricing globally for the maintenance of a register actually takes into account that you’re going to get the margin income. So if suddenly that wasn’t there and the company said, 'Well, you’re not having that', and in fact we put prices up on the other side so it’s very much an integral part of our business just like it is for most people in banks and everything else.

What percentage of 2005 revenue was related to that?

Oh I don’t know. [About $23 million of Computershare’s $27 million increase in profit before tax stemmed from higher interest rates the company earned on $US4 billion held in trust.]

It’s been reported here and in Britain that you were in discussions on a joint bid for the London Stock Exchange with Macquarie Bank. Is that an area that you '¦ ?

That was just purely a rumour.

And in terms of the London Stock Exchange. You had called it "a fantastic asset". Could you just clear the air as to what happened there?

Well we did clear the air. We’re not bidding on it.

In terms of earnings per share growth, brokers are expecting to see a 20% lift in EPS 2006. How does that sound to you?

That’s what our account forecasts say, which we confirmed at our AGM.

One of the biggest deals you've done in recent times was the $390 million acquisition of the US-based shareholder services company EquiServe. Can you tell where that long-running deal is at now?

Well we’ve settled it.

What would you say the company learned from that experience?

That regulation in the US is totally out of control. But it was just approval for a trust license which took us probably five or six months longer than we thought. Talking to other people later on, they thought we got it quicker than they thought we’d get it, so it was just one of those things.

If you were to do something like that again, would you approach it any differently knowing what you know now?

No '¦ I mean if you’ve got to get regulatory approval, you’ve got to get it.

Your price/earnings multiple is running very high now [at about 35 times, more than double the market average]. Is that something you are comfortable with?

I don’t know if it’s a problem or not. I mean, that’s up to investors.

You've had a 25% compound growth rate in net profits since 1996. If you are a long-term investor, obviously you look at some figure like that and you say that’s a tremendous story. Do you think the company repeat that in the future?

Well obviously the bigger you get, the harder it is to get those percentages. But we have just announced '” which we got approval for at the AGM '” a long-term incentive scheme for senior executives, which is over five years. For them to get the maximum benefit we have to have a 20% EPS growth average over five years, which is a very aggressive target.

Could you give some indication to our subscribers how you’re going to to achieve that?

I think strategically what we’ve done for the past five years, we’ll continue doing for the next five. But I think we’re a lot further down the track when we were then, and that was to create a global business both in registry and plans and financial services to investors and companies, and we’re just getting better and better at it and bigger and bigger. And we still really haven’t got any major competitors.

What percentage of the year are you here now and what percentage are you away?

Just at the moment over 90% of the time overseas because I’m in the UK a lot. I had some issues over there.

And you feel that’s the way it’s going to continue?

Hopefully not.

What's happened that you need to be in the UK?

A senior executive and other senior people have left the company. So myself and Stuart Crosby, our chief operating officer, are sort of running that for the next six months on and off. So we’re alternating.

You’ve never been a stock to buy for yield because at 1.6% it’s quite low. Computershare is a growth story. Is that the nature of the stock do you think for the foreseeable future as well?

Oh well we’ve just taken on a fair bit of debt with Equiserve. I mean if we got to a point where there were no other acquisitions that we were going to do, or where we’re investing the money then obviously we’d look to returning more money to shareholders as far as dividend. But I don’t think we’re at that point now. But we’ve been putting the dividends up fairly regularly and [that's] something we’ll always look at.

Can you give me some picture of where this company’s going to look like in a decade’s time, or even in five years' time?

Well I think if we can have a 20% earnings per share growth I think the remuneration is very much aligned to shareholders' aspirations, because if we did that then the share price would at least be double or three times, I would think, what it is now.

So we’ve got a dominant position now in the US and in the UK, to be honest about that. We’ve got '¦ we’re second there, probably 25–30% and there’s opportunities in continental Europe, which we’re just starting to really attack now.

And yourself, in terms of succession, which is a word that normally annoys most CEOs, but it has to be considered. What’s your plan there?

Well we’ve just appointed a couple of months ago Stuart Crosby as [COO].

He’s alternating with you on roles in the UK at the moment, so he’s getting a good chance?

Yes, he's very capable. There are another couple of people in the company that are very capable of taking it over, but obviously Stuart’s in that position.

You didn't like people tagging you as a stock linked with the level of activity on stock exchanges, so what is nature of this company, what will you be like in few years time. Tell me in a sentence.

You ask classic questions, you guys.

Have a go

It’s time we shrugged off the tech thing. We’re still a technology-driven company and financial services companies all are about technology, whether you like it or not, so we didn’t shrug it off. We got the upside of the tech boom, and we got the downside. But in the end we’re a fairly substantial company now. We’ll be judged more on our earnings capacity than whether people think we’re a tech company or something else.

We always benefit from merger and acquisition activity in the US, but it’s usually two years after that activity. So there’s a fair bit of that going down; it doesn’t affect us right now, but we’ll get the money for that in two years' time. So I suppose our aim is to really try and even it out. And I think that will be a lot better.