Marginal impact

1H23 RESULT

Need To Know

• Management EPS guidance reaffirmed for FY23, although slightly lower margin income for FY24
• Bankruptcy and Class action division sale to GCP Capital Partners for $100m (+$40-$50m earnout) 
• 30cps dividend declared (up from 24cps)

CPU’s result was in-line with consensus, delivering a 33.5% constant currency (cc) growth in management revenue to $1.56bn, driven by a ~467% increase in margin income (MI) to $352m. Management EBIT ex-MI fell ~40%, driven by a continued impact to the US mortgage services business, lower transactional based revenues, and increased inflationary impacts. CPU declared a dividend of 30cps. 

Margin income outlook for FY23 has been raised from $800m to $810m driven by stronger than forecast interest rates through 2H and a higher bank recapture rate of ~90%. FY24 MI has been downgraded to $990m from $1,010m driven by a reduction in expectations of balances, predominantly due to the sale of the Bankruptcy and Class Action businesses.

Core business results were mixed, with register maintenance revenue falling -0.6%, impacted by lower transactional activity. CCT exceeded expectations benefitting from higher yields and integration synergies remain on track. Employee share plans were impacted by lower trading volumes, although exited the half with renewed momentum.

Mortgage services are still being impacted by adverse market conditions, with low origination and re-finance volumes affecting the results. CPU have announced a new efficiency program and are evaluating other opportunities to improve returns.

Asset sales of the Bankruptcy and Class Actions divisions are in line with CPU’s strategy to simplify its portfolio and focus on businesses with strong recurring revenues. Base consideration of $100m, with additional earnouts of $40-$50m seems a bit on the cheap side at ~1.7x FY22 revenue, although these businesses have struggled in the last few years. Sale expected to complete on 1 May 2023.

Group management EPS guidance reaffirmed for FY23 of 90% growth in management EPS (~110cps) driven by higher MI, offset by lower transactional revenues. The balance sheet remains in excellent shape with net debt leverage of 1.3x, well below the 1.75-2.25x target range. CPU declared an interim dividend of 30cps, up 25%, and we expect potential capital management at the full year result.

Investment View

We had anticipated an upgrade in the FY23 MI, however had not anticipated a slight downgrade on the FY24 MI, although this is largely driven by the asset sales. Whilst the underlying business margins have fallen, we expect a return to base business growth as equity markets recover, and transactional volumes return. We retain our Buy recommendation based on valuation upside.

Figure 1: Constant currency growth result largely driven by margin income, with transactional businesses impacting EBIT margins 

Figure 2: CPU still very cheap on a PE basis with significant valuation upside