Computershare: Interim result 2015

It hasn't been among the more obvious moves on the sharemarket in the past six months, but Computershare has suffered a sharp derating all the same. Although the stock has fallen only 2% since the company released its 2014 results last August (see Computershare: Result 2014 on 13 Aug 14 (Hold – $12.04)), its forward price-earnings ratio (PER) has shrunk from 18 to 15 – while the PER on the overall market has risen.

The explanation is simple: while management reduced 2015 guidance from about 63 US cents to 61 US cents (compared to last year's 60 US cents) alongside yesterday's interim results, in Australian dollar terms that guidance has shot up from about $0.68 to $0.78. We make no bones about it: we've been shielded from Computershare's weak operating performance (and outlook) by the fall in the Aussie dollar – but, hey, we'll take what we can get.

Ironically, the weak Australian dollar – or rather the strength of the US dollar – was one of the main reasons for the downgraded guidance. Computershare makes its profits all around the world and converts them to US dollars for the purposes of reporting. This reduces the reported profits when the US dollar is strong – although Australian investors make it all back and more when converting back into Aussie dollars.

The other main culprit for the reduced guidance was the low interest rate environment, reducing the margin Computershare earns on some of its client cash balances. Although the balance itself rose 5% to $15.1bn over the 12 months to December, margin income fell 16% to $89m thanks to a fall in the average interest rate from 0.7% to 0.6%.

Of course the original guidance was pretty low in the first place, and the reasons for that were also born out in the result. Most significant was a 21% fall in US earnings before interest, tax, depreciation and amortisation (EBITDA) to $83m due to various cyclical factors – fewer large bankruptcies, reduced corporate activity and low interest rates – as well as a lost loan services contract and the sale of Highlands Insurance.

Australia and New Zealand was another weak spot, with EBITDA falling 14% to $35m due to the lower Australian dollar as well as a the loss of Serviceworks' largest client, Australian Power and Gas to a takeover by AGL Energy.

On the plus side of the ledge, higher corporate activity helped Canada to a 15% increase in EBITDA, to $42m, while Asia enjoyed a 20% rise to $22m thanks to strength in register maintenance and employee share plans.

UK writedown

EBITDA increased 11% to $62m in the eclectic mix of the UK, Channel Islands, Ireland and Africa, boosted by the acquisition of Homeloan Management, a cunningly named mortgage administator.

The UK was, however, the source of a previously flagged $110m writedown, which was taken against the UK Voucher Services business after the UK government decided that it could manage the provision of childcare accounts on its own. In recent years the business has contributed about 2-3% of group EBITDA so, while it will hardly leave a gaping hole, it will be missed.

Overall, management's measure of underlying EBITDA fell 3% to US$259m. Operating cash flow was also poor, falling 23% to US$148m, with working capital expanding due to 'an extended margin income collection period' and the 'settlement of certain prior period accrued expenses'. It meant that net debt rose from $1,150m at the end of June to $1,213m in December.

The interest bill was covered 10 times by underlying EBITDA and five times by free cash flow, which is tighter than we'd like and it's slightly disconcerting to see it going in the wrong direction. Still this result follows strong cash flow performances at 2014's final result and interim result, so it's not an immediate concern although it does require watching. It also tips the scales in favour of a slight increase in our business risk rating from low-medium to medium.

When we upgraded Computershare almost four years ago (see Computershare takes the lion's share parts one and two starting on 16 Jun 11 (Long Term Buy – $9.32)) we were happy to pay a PER of 20 because we felt there were good reasons to suppose that earnings could be materially higher: higher corporate activity; higher interest rates; benefits from the acquisition of Shareowner Services; and a fall in the Aussie dollar. As things stand we're still waiting for the first two, the third has had partial success and the fourth has come through in spades.

As a result, the shares have risen 23%, but the forward PER has fallen by a quarter to 15. This changes the investment case somewhat – instead of needing an increase in corporate activity and higher interest rates, we can get by with just hoping for them and exercising patience – something we have plenty of. If you do too, then we recommend Computershare as a BUY.

Note: Our model Growth and Income portfolios hold shares in Computershare.

Disclosure: Staff members own shares in Computershare.