CPU

Computershare (CPU) was one of the star performers during the recent reporting season, beating market expectations at its 1st half result, according to analsyst Macquarie Research Equities. On Friday, Computershare management held an investor briefing in Melbourne to update the market on the company's progress. On the back of Friday's briefing, the analyst has made slight increases to their 2007 and 2008 Earnings Per Share (EPS) forecasts. No specific financial metrics were discussed, however, the tone of the presentations was positive reflecting the group's leverage to the cyclical momentum in M&A. The analyst's earnings upgrades in 2H07 largely reflect higher corporate action revenue assumptions from transactions that occurred in 1H07 (Verizon, AT&T). Analyst's FY07 EPS growth is now 56%, above management's guidance of 50%. In 2008, +13% FY08 EPS growth reflects the lagged revenue impact of share registry clean-ups (which may occur up to 18 months post the transaction), price increases and modest acquisitive growth.
The entry of a private equity competitor in the Australian share registry market has improved price rationale. Similarly, price increases on contract renewals are expected in the UK following three consecutive years of price declines, as the Lloyd's share registry business is likely to end up in the hands of private equity. Private equity owners are more likely to display price discipline, with a heightened focus on profit orientation rather than cross-subsidisation. While this has positive implications for pricing, the market's appreciation for CPU has historically been due to its ability to deliver EPS accretive acquisitions more so than deliver modest price increases on contract renewals. With the Mellon and Bank of New York merger and the likely sale of Lloyd's share registry business to private equity players, the ability for CPU to make material acquisitions in the share registry space will be difficult. It should come as no surprise that CPU is unable to participate in the Lloyd’s bidding process due to competition issues. With Link's acquisitive appetite in global share registry businesses, there is increased competitive bidding tension. By way of illustration, CPU's acquisition policy was "to pay no more than 6x EBITDA multiple" whereas "private equity players are now paying more than 10x".
Given CPU's strong cashflow generation and undergeared balance sheet, the analyst estimates that the group has the capacity to fund further capital management or acquisitions, with an estimated US$700m debt capacity, based on management’s target of net debt to management EBITDA of 3x (0.97x currently). Outside of smaller share registry acquisitions, further acquisitions are likely to be in areas where CPU can leverage its strengths (albeit lower synergies) in administration such as employee plans and unit funds administration.

Last week, global markets stumbled following reports that China was looking to impose controls to curb its rapidly growing economy and concerns that a soft landing for the US economy may be more difficult than first thought. In the background, the Australian reporting season continued its final week, here are analyst Macquarie Research Equities (MRE) observations and thoughts. The HY December 2006 aggregate earnings reported for the market printed 1.5 percentage points below analyst expectations versus those held at the start of this reporting season.

Computershare (CPU) has retained its Hold rating from Citigroup Investment Research with a $7.47 share price target. The share analyst has noted that Computershare stocks "appears to be fully valued notwithstanding strong operational momentum."

SB Citigroup has rated the Computershare (CPU) stock as a Hold, Medium Risk with a valuation of $6.91. The broker has noted that there is little chance of the group not meeting earnings expectations for its upcoming result, but also suggests management are unlikely to provide too bullish an outlook given the market is factoring in EPS growth of about 25% in FY07.