The central processing unit or CPU is a fundamental component of any personal computer enabling the efficient processing of data between all other involved network components (certainly someone can correct me here). In a sense, so is CPU …
The idea. While researching an Asian company I stumbled over another Asia-pacific based company that got me interested, reading its financial reports. Doing initial research on the company I listened to its earnings call. After listening to a beautiful passage about how the company supported its employees (below) I had to dig deaper! The statement reads even better within the CEO’s broader message …
»there is more to life than chasing short-term EPS … we will get multiple returns on these investments in our employees.«FY 2020 earnings call
The company is rather complex, but might well be worth it to dig deeper into. I did not follow through and just publish some incomplete quicky now after some news made the company/structure even more complicated. Additional shares were issued to acquire additional business that fits quite well! The shares rebounded quickly from a depressed level. Earnings were depressed due to low interest rates, which affects CPU’s earnings on very high cash depositis for clients’ transactions (ie M&A). My dear hope is to ‘clear’ my mind by publishing the below old data and hopefully revisit the idea at a later point in time.
Computershare is or was a $6bn market capitalization company based in Australia. It performs a range of B2B services, mostly financial services. These services/processes are outside the core business of the company’s customers and thus usually outsourced to third parties.
Its shares (CPU AU) are traded at ASX since 1994 and delivered outsized total shareholder returns of 22% (dividends reinvested). The share price crashed -50% in early 2020 but already recovered strongly since. Current indications (when I drafted this) were for a fwd 22x P/E and a 4% dividend yield.
- For German investors, dividends from Australia can be subject to foreign withholding tax (bzst link).
- They can be tax-exempt if they are frank-dividends.
- Usually some of CPU’s dividends are franked
- They can be tax-exempt if they are frank-dividends.
The company’s story: One of Melbourne’s first start-up technology companies, we were founded in the city’s suburbs in 1978. Our initial ambition was to provide computer services to businesses that needed to automate processes. Eventually, we progressed to providing specialist computer bureau services to Australian share registrars, something we quickly excelled at. Harnessing our entrepreneurial spirit, we continued to develop best in class technology that minimises risk, reduces cost and simplifies processes for our clients and their customers.
We built on our share registry business by successfully expanding into employee equity plans, stakeholder communications, corporate governance, fund services, class action administration, deposit protection and most recently, mortgage servicing. Over the years, we’ve expanded globally by acquiring other successful companies and growing our local footprint organically.
I discovered the company reading financial reports from an Asian company.
The business is different from but in a certain way it reminds me of Broadridge: Computershare is basically unknown to end users, or better to say end-beneficiaries (i.e., shareholders, mortgage borrowers) but often essential for smooth and efficient processes between all the various intermediaries! The company is well entrenched within the financial services industry. It is plumbing considerable parts of corporates’ critical processes outside of their core business.
Many of the world’s leading organisations use [Computershare] to streamline and maximise the value of relationships with their investors, employees, creditors and customers. By working with Computershare, […] clients benefit from […] long standing, trusted relationships with third parties and advisors, forged from more than 30 years’ experience in financial markets across the world. – company website (about)
- Issuer Services
- Mortgage Services & Property Rental Services
- Employee Share Plans & Voucher Services
- Business Services
- Communication Services & Utilities
- Corporate & Technology Services
Could Computershare be a digital Fastenal, I wondered when I read the following about Fastenal. Maybe even a better Fastenal in today’s world (war for talent)? Think about a successful software company with highly talented employees (getting offers from competitors) and there are problems administering the employees share plans… : It is self-evident that I’ve never run a manufacturing facility or can fully understand what it’s like to work on the floor of a production facility and need easy and fast access to fasteners and other supplies. But I have run a small business for most of my adult life and I can empathize with the way a company would value effectively outsourcing their basic supply inventory management to a third party so the company can focus on the highest and best use of their own time. (intrinsicinvesting)
Issuer Services comprise register maintenance, corporate actions, stakeholder relationship management, corporate governance, and related services. It is the largest segment by revenue and operational profit (adjusted EBIT).
Mortgage Services & Property Rental Services comprise mortgage servicing and related activities, together with tenancy bond protection services in the UK. US Mortgage Services was impacted by the extended moratorium. A strong rebound could be in the making.
Employee Share Plans & Voucher Services comprise the provision of administration and related services for employee share and option plans, together with Childcare Voucher administration in the UK. Employee share plans are a common tool in (young) technology companies for i) saving cash, ii) retain top talent and iii) building a capital stock for employees which is getting more difficult with lower interest rates.
Business Services comprise the provision of bankruptcy, class actions and corporate trust administration services.
Communication Services and Utilities operations comprise document composition and printing, intelligent mailing, inbound process automation, scanning and electronic delivery.
Technology Services comprise the provision of software specialising in share registry and financial services. The company’s regional focus is on the US accounting for half of total sales, mostly within issuer service and mortgage services. (UCIA stands for UK, Channel Islands, Ireland, and Africa)
Current low interest levels are a drag on earnings since it i) depressed net interest margin income (MI) on cash balances held temporarily for customers and ii) it resulted in shorter average lives of US mortgages due to higher refinancing activity (accelerated run of lead CPU to amortize its MSR over a shortened period of 8yrs now). Rising interest rates (in the US) could be a boost to CPU’s earnings in the future and make it a rather contrarian bet. But let’s take a more detailed look at ex-MI or structural earnings to validate their strategy to …
… build stronger, more efficient business with greater leverage to long term structural growth trends. – Stuart Irving, CEO (1H21 transcript)
Reading or listing to their earnings calls /transcripts really gives me the impression that their business’ underlying earnings (ex. margin income) has long-term sustainable tailwinds to its advantage. Recent full FY 2020 results are for the financial year ending June 2020 (letter, presentation) and 1H21 results were released in February.
Why is the company currently cheap and what’s the potential edge? Computershare currently faces some headwinds, many related to the pandemic. For example, lower interest rates level strongly lowers its margin income. CPU temporarily holds cash for its customers (i.e., for corporate actions) and earns net interest margin on it, currently suppressed by low interest levels. Company seems underfollowed internationally:
- https://www.valueinvestorsclub.com/idea/Equiniti/6141131473 (only hit for ‘CPU’)
I hope to revisit the company in the future to take a lcoser look with a clear head. Posting the idea and some of my thoughts will hopefully support that.