All about balance

TRADING UPDATE

Need To Know

• FY23 group earnings guidance reaffirmed
• Margin income guidance for FY24 downgraded to $860m, ~6% below consensus. Lower average client balances 
• ~$2bn+ in balance sheet capacity

CPU presented a trading update where it reaffirmed its FY23 guidance, albeit with a slight mix change.

Margin Income guidance. FY23 margin income was slightly downgraded from $810m to $800m, and FY24 margin income was significantly downgraded from $990m to $860m. The main driver is meaningful fall in the average client balances expected in FY24 from $22.6bn down to $18.9bn. This led to a ~$142m impact on the FY24 guidance, with the remainder comprised of a -$20m hedging impact, partly offset by a $32m positive impact from higher rates expectations. The $860m is a ~6.5%+ downgrade from current consensus of ~$920m.

Hedging offset? With global interest rates looking like they are peaking, CPU has consciously made a decision to increase its hedged component of its book up to ~50% (with 26% locked in as at 1 May 2023). CPU aims to ensure that it can target $300m p.a. in margin income from FY25-FY30 to provide more earnings stability. These will largely be made up of interest rate swaps to manage liquidity and are expected to deliver a target yield of 3.10-3.65%.

Substantial balance sheet strength. CPU claims to have an ‘active pipeline of M&A opportunities’ and has $2bn+ in acquisition capacity available. CPU targets a maximum leverage of 2.5x net debt/EBITDA, where it currently expects to be under 1x by FY23. The 1H23 result disappointed investors with no buyback program announced in lieu of acquisitions, however CPU explicitly mentioned it intends to return surplus capital to shareholders through dividends and buybacks, which we expect to see at the FY23 result in August.

Investment View

The lower client balances impacting margin income guidance is disappointing to see given the positive impact of rising rates and a resilient base business being key to our investment thesis. We do anticipate balances recovering as and when equity transactional markets recover, although this could be longer dated. 

The update today will likely see ~4-5% consensus downgrades to FY24 EBIT. On the flip side, lower than expected opex and expected tax rates will provide some offset. The imminent sales of the mortgage businesses also provide additional catalysts for significant capital return programs for shareholders. 

Whilst the update is disappointing, CPU continues to trade on incredibly low multiples, and we retain our Buy rating.

Figure 1: The lower balances impact is partly offset by lower capex and tax rates

Figure 2: PER trading well below history

Figure 3: Trading below market