Computershare: Welcome the downturn
Recommendation
In a recent Dumb questions for Intelligent Investors video on Computershare, we described this company's business as partly very stable and partly very cyclical.
That was apparent in the results for the half-year ended 31 December 2011. The most cyclical parts of Computershare’s business—extremely profitable when firing on all cylinders—had a tough, quiet period. Low levels of capital raisings and mergers and acquisitions in the company’s most important share registrar markets took their toll on earnings.
Revenue was down 4.4% on a constant currency basis, resulting in more significant falls in EBITDA, down 18% to US$212m, and underlying earnings per share (EPS), down 19% to US23.1 cents.
Key Points
- Part of the business at cyclical lows
- Acquisition could increase profits
- Growth will come with more corporate activity
Expressed another way, the EBITDA margin fell from 31.5% to 27.1%, mainly due to the low levels of activity in the cyclical, higher-margin parts of Computershare’s business. Low interest rates didn’t help either, depressing earnings from the company’s massive (and growing) float of client cash.
None of this, however, will be a surprise to those who’ve read our recent reviews of the stock (see Computershare takes the lion’s share – part 1 and part 2 for your first port of call). The cyclical lows in its business is actually part of its attraction for value investors.
Half to 31 December | 2011 | Raw change (%) | Constant currency change (%) |
---|---|---|---|
Revenues (US$m) | 781 | 0 | -4.4 |
Underlying EBITDA (US$m) | 212 | -14 | -18 |
EBITDA margin (%) | 27.1 | -440bp | -440bp |
Underlying net profit (US$m) | 128 | -14 | -19 |
Underlying EPS (US c) | 23.1 | -14 | -19 |
DPS (A c) | 14 | 0 | 0 |
Franking (%) | 60 |
Conservatively, management have forecast no improvement for the second half and expect full year EPS to be down 10-15% on 2011’s results.
The stock is down 5% since 8 Nov 11 (Long Term Buy – $8.31) and, using forecast earnings and converting them back to Australian dollars, trades on a forecast PER of 17-18.
Despite the obvious value inherent in the company’s dominant global market position, this doesn’t look screamingly cheap. But it is based, according to CEO Stuart Crosby, on an ‘all-time high’ reliance on the ‘annuity’ parts of its business. Inverting this remark, one could call it an all-time low reliance on the cyclical parts of the business.
Cyclical comeback
From here, there’s a lot of room for pleasant surprises. Firstly, there’s the almost assured growth in earnings over the next few years from the merger of Computershare’s US operations with BNY Mellon’s Shareowner Services business, creating by far the most dominant share registrar in the world’s largest stockmarket.
The ‘almost-assured’ part of that growth will come from cost cutting, but there should also be the opportunity for improved revenue through cross-selling. It’s a very exciting acquisition (words you’ll rarely hear from us).
Then there’s the inevitable growth (but unknown timing) from when general corporate activity improves to more normal conditions (or, dare we say it, to better than average conditions). Add to that the likelihood that global interest rates are unlikely to remain at record lows forever.
The company’s float of stable client cash balances now stands at US$12.1bn (up from US$9.2bn a year ago and US$6.4bn in June 2009). Although not all the benefit of higher interest rates will flow to Computershare, it would still put a rocket under earnings.
Then there are the more esoteric potential factors; a lower Australian dollar or the potential for major changes to the archaic US share registrar industry to drag it into the 21st century (to Computershare’s great advantage). This recommendation isn't reliant on these factors but either could prove extremely beneficial.
If Computershare was merely an annuity business trading at 17-18 times forecast earnings, we wouldn’t be interested. But coming with it, almost free of charge, is a cyclical business that is extremely profitable over the whole course of a cycle. That it currently sits in the doldrums is no reason for long-term pessimism. We welcome such asymmetry. LONG TERM BUY.
Note: The model Growth portfolio owns shares in Computershare.