Finding its balance

RESULTS

Need To Know

• Slight FY23 EPS beat (109.7cps vs 108cps) however softer FY24 guidance provided (116cps vs 121cps), where we expect mid-single digit downgrades
• $750m buyback program announced, although still considerable balance sheet strength for further capital initiatives ($2.5bn capacity by end of FY24)
• FY24 margin income guidance cut once again ($840m from $860m) due to lower client balances, partly offset by higher rate environment

Investment Implications

CPU is unfortunately caught in a difficult position where it is majorly benefitting from higher interest rates, however its underlying base business as a result of higher interest rates, is suffering. Revenue ex-margin income (MI) was up just ~1.3% on FY22, with EBIT ex-MI suffering a -24.9% fall, as market facing activities, in particular bond issuances, were heavily impacted by an uncertain macro environment. The 2H did improve however on 1H, rising ~67%, although still down -13% on 2H22. FY24 EPS is expected to increase 7.5%, with growth in core fees and further recovery in EBIT ex-MI, although this is slightly below consensus (116cps vs 121cps). 

Margin income was marginally below prior guidance for ~$800m, coming in at $792.1m, with the culprit being lower average client balances. CPU were anticipating $35.1bn, however ended with $34.0bn, impacted by lower corporate activity. 

Looking to FY24, the exit average balances of $29.8bn are again below expectations however are 'expected to be stable.' We are hesitant to cling to the statement just yet, however as overall market conditions improve, we note there is scope for upside.

The lower overall balances are partly offset by a higher average yield, with CPU anticipating 2.82%, vs 2.71% in May. The sum of the two led to lowering the FY24 MI guidance to $840m, down from $860m. A $1bn change in client balances is likely to lead to a ~$50m PBT impact and a 25bps change in interest rates equates to a ~$22m impact to margin income. We don't expect rates to move higher from here, with the swing factor therefore being client balances.

CPU continues to win new clients in its Issuer services segment, although transactional revenue continues to be impacted. The Corporate Trust is growing strongly, despite lower bond issuances not offsetting run off. The integration synergies are also coming in slightly better than anticipated.

Mortgage services which has struggled saw a better 2H, with lower opex and higher MI contributing to flat management EBITDA on FY22. Lower refinancing volumes and weaker originations continue to impact the business. The cost out program has led to run-rate savings of $50m to help drive profitability. The UK disposal discussions continue and CPU continues to 'evaluate strategic options' in the US. We expect this business segment to remain under pressure with higher interest rates, and would be supportive of any divestments and subsequent capital returns.

The balance sheet remains in an incredibly strong position (Net Debt/EBITDA of 0.85x, well below the 1.75-2.25x target), leading to management announcing a long overdue buyback of A$750m and a higher dividend. CPU expect to have 'balance sheet capacity' of $2.5bn by the end of FY24.

Investment View

The market will likely be torn by the positive news of the announced A$750m buyback and capital return supporting the share price, however offset by a ~4% downgrade to FY24 EPS expectations. 

Lower client balances than expected clearly remains a concern, where management comments of 'expected stability' may not be believed. With the leverage to corporate activity and market conditions however, we believe there is some upside risk to this and potential conservatism in managements numbers.

CPU continues to trade on incredibly low multiples, supported by 'higher for longer' rates. Whilst we don't expect rates to rise higher, CPU can continue earning significant levels of margin income, which it is likely to payback in the form of dividends and buybacks. Trading on just ~13x PER, and an improving dividned yield outlook, we retain our Buy recommendation.