Computershare’s CPU fiscal 2024 underlying results were largely as expected, with core businesses performing a little better than expected. Underlying EBIT of USD 1.15 billion met our forecasts, with stronger operating income (excluding margin income) offset by slightly lower margin income than anticipated.

Core segments such as issuer services, employee share plans, and communication services delivered better-than-expected volumes, leading us to marginally increase our fair value estimate to $26.50 from $26.00 per share. This adjustment reflects stronger revenue growth in Computershare’s core businesses, which we expect can be maintained. We make minimal changes to our medium-term margin income projections.

Shares currently screen as fairly valued. We forecast mid-single-digit growth in underlying earnings per share over the next five years, supported by a recovery in business volumes following the 2022-23 market volatility, as well as ongoing cost synergies from past acquisitions. Management also has a new cost-out program, which should further support margins.

We expect margin income to make up a smaller portion of earnings as interest rates trend down from fiscal 2025 onward, as current futures curves suggest. Specifically, we project margin income accounting for 45% of EBITDA by fiscal 2029, from 65% currently. That said, efforts to lock in a portion of margin income at elevated rates should mitigate the impact of declining global interest rates on absolute yields in the short term.

The stronger-than-expected rebound in operating margins underscores management’s ability to deliver synergies and signals improved revenue momentum. Cyclical factors, such as double-digit revenue growth in issuer services—driven by a recovery in event and transactional revenue—contributed to this improvement. But there are also more enduring drivers. For instance, the rollout of new technologies in employee share plans helped capture new volumes and increase core fees.

Business strategy and outlook

Computershare services more than 25,000 firms globally. Alongside its register maintenance services, the firm leverages its records management skills to service adjacent areas like corporate actions or annual general meetings. Acquisitions are pursued to bolster growth, such as the acquisition of Wells Fargo’s corporate trust arm in 2021 and Equatex, an employee share plan provider, in 2018. Its product variety supports cross-selling. Competition is fragmented, and peers struggle to compete with Computershare’s breadth of products, long-dated contracts, high retention, integration experience, and capability in servicing an increasingly transnational securities industry.

The firm is focused on revenue diversification and improving operational efficiency. Computershare has a record of acquiring and integrating businesses into its proprietary share registry system and cutting costs. Continued investment in automation and IT improves operational efficiency and supports expansion into new segments, diversifying the revenue base. Around 86% of revenue is recurring, with the remainder from transactions like corporate actions.

The firm has material exposure to interest rates by virtue of the interest it earns on client-owned cash balances. Several business segments hold significant cash on behalf of clients, such as dividend and takeover payments, buyback funds to be disbursed, IPO proceeds, and capital raisings received. Computershare earns interest income on these funds.

We expect cost-cutting, alongside recovery in business volumes across core business units (following the 2022-23 market volatility) to drive mid-single-digit growth in underlying earnings per share over the five years to fiscal 2029. The core registry and related services businesses are mature, and we expect modest growth from here on. Margin income is expected to taper from levels seen in fiscal 2024, but remain higher than levels seen over the decade to fiscal 2022. Despite the firm’s exposure to cyclical markets, earnings growth should normalize at low- to mid-single-digit rates over the long term so long as there are no major system failures or acquisition missteps.

Moat rating

We assign Computershare a wide moat rating. The firm’s diverse set of services—built up by acquisitions and supported by its superior technology—establishes switching costs for its clients and facilitates cross-selling opportunities. As long as there are no major system failures (and there have not been for Computershare), the group's global reach and ability to cross-sell also builds cost advantages. High barriers to entry, scale advantages, and high switching costs underpin future earnings and returns on invested capital. Moreover, interest earned on client-owned cash balances, which are exposed to interest-rate movements, are material and supplement excess returns. ROICs remained above Computershare’s cost of capital despite a low-rate environment over the decade to mid-2022.

Computershare’s share registry and related services business—comprising issuer services, employee share plans and communication services—is the largest in the world. It is also the only share registry business to operate on a global scale, supported by its scalable technology platform. Its cross-border capabilities are valued by global corporations. The cross-selling of services, like selling employee share plans and communication services together with issuer services, increases switching costs. Underlying growth in business volumes helps build economies of scale and establishes a cost advantage.

The low propensity to switch providers is evidenced by Computershare's improving client retention rate to nearly 100% and long client tenure. The reluctance of customers to switch makes it difficult for competitors to win market share, and growth normally requires acquisitions of other providers or is achieved by targeting IPOs, which Computershare has done over the years. Generally speaking, medium-size and large companies don't change share registry providers unless problems occur with the service. The potential financial benefits of switching are normally outweighed by operational, reputational, and regulatory risks of doing so. Customers have a low tolerance for processing errors and value Computershare’s service reliability, functionality, track record, and registry-related services.

Computershare likely enjoys a marginal cost advantage relative to peers, but it is difficult to quantify due to a lack of publicly available and comparable financial data. Multiyear contracts and near-100% retention rates create a barrier to competition and likely prevent competitors from achieving the rapid growth required to achieve economies of scale. The group's share registry and related businesses keep prices at competitive levels to grow volumes and keep competitors at bay. For example, in the issuer services segment, the number of globally managed shareholder accounts grew to 37.5 million in fiscal 2023 from 36.7 million in fiscal 2018, while revenue per account compressed to USD 23.50 from USD 24.50 over this period.

We think the corporate trust business, which Computershare significantly expanded with an acquisition from Wells Fargo in 2021, also has a narrow moat based on switching costs and cost advantages. We expect the business’ highly recurring nature of revenue, long-standing customer relationships, and the capital-light nature to generate excess returns on capital over our forecast period.

We see no competitive advantages in Computershare's mortgage servicing business, which is close to being fully divested after the sale of its US operations to Rithm Capital in the fourth quarter of fiscal 2024. Management had expected mortgage servicing to generate ROICs in the midteens, outstripping our weighted average cost of capital for the group of 8.4%. This has not materialized, and if it ever does, reflects only the capital-light nature of the business. Computershare can also lose mortgage servicing revenue if mortgages are prepaid early. Interest-rate movements and borrower defaults can also have an impact on returns.

Computershare faces potential disruption from new business models and technologies, such as blockchain. But we expect the company to leverage its leading market position and relatively high technology spending to maintain its competitive advantage. Moreover, blockchain technology is presently most applied to areas like identification and payments. Share registry services are mandated by regulation, and any prospective disruption by blockchain will require substantial stakeholder buy-in and infrastructure buildout. These are very lengthy ordeals, and accordingly, we don’t expect Computershare to be disrupted by blockchain technology in the foreseeable future.

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Terms used in this article

Star Rating: Our one- to five-star ratings are guideposts to a broad audience and individuals must consider their own specific investment goals, risk tolerance, and several other factors. A five-star rating means our analysts think the current market price likely represents an excessively pessimistic outlook and that beyond fair risk-adjusted returns are likely over a long timeframe. A one-star rating means our analysts think the market is pricing in an excessively optimistic outlook, limiting upside potential and leaving the investor exposed to capital loss.

Fair Value: Morningstar’s Fair Value estimate results from a detailed projection of a company's future cash flows, resulting from our analysts' independent primary research. Price To Fair Value measures the current market price against estimated Fair Value. If a company’s stock trades at $100 and our analysts believe it is worth $200, the price to fair value ratio would be 0.5. A Price to Fair Value over 1 suggests the share is overvalued.

Moat Rating: An economic moat is a structural feature that allows a firm to sustain excess profits over a long period. Companies with a narrow moat are those we believe are more likely than not to sustain excess returns for at least a decade. For wide-moat companies, we have high confidence that excess returns will persist for 10 years and are likely to persist at least 20 years. To learn more about how to identify companies with an economic moat, read this article by Mark LaMonica.

Uncertainty Rating: Morningstar’s Uncertainty Rating is designed to capture the range of potential outcomes for a company. An investor can think of this as the underlying risk of the business. For higher risk businesses with wider ranges of potential outcomes an investor should consider a larger margin of safety or difference between the estimate of what a share is worth and how much an investor pays. This rating is used to assign the margin of safety required before investing, which in turn explicitly drives our stock star rating system. The Uncertainty Rating is aimed at identifying the confidence we should have in assigning a fair value estimate for a stock. Read more about business risk and margin of safety here.