12 Apr 2022


Why we have initiated a position in Computershare

Computershare (ASX:CPU) is a global leader in the provision of shareholder registry services, employee equity plans, proxy solicitation, stakeholder communications and other diversified financial services including loan and mortgage servicing. As a recent addition to the portfolio of The Montgomery Fund and The Montgomery [Private] Fund, let’s take a closer look into the business.

The business has been listed since 1994 and has grown both organically and through acquisitions to expand its reach in both product and geography and build scale.

The company’s main products include:

  • Issuer services – managing shareholder registry activities for listed companies. This division comprises traditional register maintenance as well as Corporate Actions (including capital raising and dividend payment management) and Stakeholder Relationship Management.
  • Employee share plans – managing equity plans and administration, with over 28 billion in shares / options / units under administration.
  • Mortgage services – whereby CPU earns a fee for managing loan repayments of mortgage portfolios to be paid to the ultimate owner of the mortgage. The servicer is not exposed to default risk.
  • Business services – including corporate trust, bankruptcy and class action services.

The business is exposed to growth in trends such as shareholder numbers, increasing equity participation, capital markets activity (albeit bankruptcy is negatively correlated) as well as rising rates.

The company also manages a significant fiduciary balance which generates income, much like a float in an insurance company. The source of fiduciary balances is diversified across its various business units, with the primary source related to its Issuer services division.

We have initiated a position in CPU as we see the business as a significant beneficiary of rate increases on to its sizeable fiduciary balance, with expectations of an accelerated rate rise environment becoming the consensus view by markets. Based on its average balance over the June 2022 half-year, CPU estimates a 100 basis point increase equates to an annualised earnings per share (EPS) boost of 26 cents per share – which is almost 50 per cent of analyst earnings per share estimates for Fiscal 2022.

Computershare’s projected earnings are augmented from its acquisition of Wells Fargo Corporate Trust (CCT) at the bottom of the rates cycle in March 2021, which has added around 70 per cent to the fiduciary balance exposed to the rising rates cycle. We believe the acquisition will provide significant synergy and revenue opportunities, including optimizing CCT margin income on its fund balances, new non-interest revenue streams and traditional back-office cost synergies.

Overall, we believe market estimates underappreciate the potential earnings leverage from a rising rates cycle, with potential upside in terms of cost synergies and interest income attributable to the acquisition of Wells Fargo’s CCT business.

The Montgomery Funds owns shares in Computershare. This article was prepared 11 April 2022 with the information we have today, and our view may change. It does not constitute formal advice or professional investment advice. If you wish to trade Computershare you should seek financial advice.


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