The recent collapse of SVB and potential threat of financial contagion, coupled with data signalling peaking of inflation has caused the market to dramatically change its forecasts on central bank action and global interest rates. We review the potential impact to Computershare (CPU) where forward interest rate curves have declined across all major geographies, except for the UK.
Rate sensitivity. As highlighted in our recent reports, margin income is a significant component of group earnings, which has recently been exacerbated by the acquisition of the Corporate Trust business in late 2021, which has almost doubled the interest rate exposed client balances (from ~$12.1b in FY19 to ~$22.6b in FY24e). We estimate ~75%+ of FY23 EBIT will come from margin income. CPU stated in its 1H23 results that a 25bps change in interest rates will have a ~$35m p.a. impact on its margin income, or ~2.8-3.0% impact to group EPS.
Changes to forecasts. CPU has guided to margin income of $880m for FY23e and $990m for FY24. These were based on weighted average rates of 2.25% and 2.91% respectively. Using CPU’s provided sensitivity analysis and assuming a c.0.75% change in interest rate expectations over FY24, we would expect a c.$105m impact, or ~11%. The stock has fallen ~10% from its peak on 9 March 2023 before the SVB collapse, which is in-line with the FY24 expected earnings impact.
Geographic mix? The exposed balances are predominantly US based (~73%) with the second most significant being the UK (~17%). Canada and Australia make up the rest of the majority, although for sensitivity purposes, the US and UK are the most material. The Overnight Indexed Swap (OIS) in the US is the key rate to watch, although note that CPU can only aim to achieve ~90% of the rate given banks need to make a profitable margin. We note that whilst the US OIS has fallen by ~0.75% over FY24 and are pricing in rate cuts, the UK interest rates curve has not changed materially.
Investment View
Whilst margin income has been downgraded due to unforeseen external events, CPU still has an extensive cash balance, and significant debt headroom to increase gearing from 1.3x to 2.0x with which to fund capital returns. There is also the flagged sale of the UK/US mortgage businesses providing a potential catalyst for a special dividend or buyback. The PE de-rate has been severe from ~26x to ~12x, and we retain our Buy recommendation given the significant potential valuation upside and capital returns.
Risks to Investment View
CPU’s earnings are incredibly sensitive to interest rate changes given its margin income profile. Any meaningful changes to interest rate expectations and central bank actions may have considerable impact on future earnings. CPU is largely $USD exposed, where changes to foreign exchange rates would impact the $AUD valuation. Recent acquisition synergies may not be as beneficial as the company has guided to, leading to earnings risks and potential cost blowouts.
Recommendation
We have retained our Buy recommendation.
Figure 1: The US OIS curve has shifted downwards since the result in February
Figure 2: The PER de-rate has been significant, where there is considerable valuation upside potential
