We lift our fair value estimate for wide-moat Computershare CPU to $28.00 per share from $26.50, driven by higher cash balances—which generate margin income—over our five-year forecast period and the time value of money. This is underpinned by likely stronger capital market activity over the medium term compared with present levels, contributing to higher cash balances. Our prior forecast, while allowing for a recovery in market activity, assumed minimal growth in cash balances, which was rather pessimistic. Shares of Computershare are presently fairly valued.

Current futures curves suggest global interest rates will keep declining from fiscal 2024 levels throughout fiscal 2025-2026 before stabilizing with a more gradual drop from fiscal 2027 onward. We expect the firm’s margin income yields to decline to approximately 1.83% of average client cash balances by fiscal 2029 from a peak of 2.87% in fiscal 2024. These projected yields remain higher than the 0.56% seen in fiscal 2022, partly due to the firm’s strategy of locking in a portion of margin income at elevated rates through interest rate swaps. Note that the firm cannot simply invest all of its client cash balances into long-dated securities as they are less liquid, which would counter the need for clients to access their funds quickly.

We forecast margin income to make up around 63% of group EBITDA in fiscal 2025, reducing to about 49% by fiscal 2029. Approximately two-thirds of Computershare’s USD 29 billion in client balances (around USD 18 billion) are exposed to interest rate fluctuations, with just over half of that hedged.

Computershare's annual general meeting builds on its August updates, highlighting continued improvements in employee share plan trading volumes and stronger-than-expected corporate actions. We anticipate capital market activity will continue recoveringfrom the lows of fiscal 2022-2023, supported by easing interest rates and relatively low market volatility.

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 about finding different sources of moat, read this article by Mark LaMonica.