Computershare Limited (ASX: CPU) is an integrated global provider of share registry administration services with a significant footprint in North America, the United Kingdom and Asia. Computershare provides total share administration solutions to listed companies like BHP Billiton Limited (ASX: BHP), National Australia Bank Ltd (ASX: NAB) and Woolworths Limited (ASX: WOW) (to name a few), and competes against the likes of Link Administration Holdings Limited (ASX: LNK) – owner of rival Link Market Services.
Computershare revealed first-half results on Tuesday last week, disappointing the market and seeing its shares slump 10% over the course of the week to trade near 52-week lows. With the company due to trade ex-dividend on 18 February, here's why I think it might be time to buy.
Weak earnings
To put it bluntly, Computershare's results were weak at best. Whilst headline figures show management reported basic earnings per share (EPS) growth of 445.5% on the prior corresponding period (pcp), this "growth" was largely attributable to impairment charges of $109.5 million booked in the pcp (i.e. 6 months ending 31 December 2014). In fact, management EPS, the more conventional measure of EPS for Computershare, were down 10% on the pcp with management reporting a softening of market conditions as a key contributor to earnings weakness. In constant currency terms (i.e. without fx rate adjustments), Computershare's results were down 5.9% on the pcp, despite revenue increasing 5% (in constant currency) compared to the same period.
Nonetheless, management reiterated its full-year 2016 guidance of management EPS being 7.5% lower on full-year 2015 results. Additionally, it increased the dividend to a fully-franked 16 cents per share (versus 15 cents per share, 20% franked in the pcp). This highlights management's resolve to pay-out more franking credits and boost the after-tax yield by almost 18.5%.
Growth potential
Although its results were underwhelming, I believe Computershare is worth buying at current levels because of the significant growth potential it represents.
Current business
Computershare's existing businesses appear robust; its core registry maintenance service continues to provide annuity-style revenue, whilst its smaller revenue segments blossom with strong revenue growth. This should become more pronounced if M&A activity spikes or market volatility dissipates.
Notably, Computershare reports earnings in U.S. dollars, meaning on-going depreciation of the Australian dollar has a pronounced effect on results. Whilst this augurs badly for headline results, Australian investors should benefit from translational gains in Australian dollar terms.
Additionally, the circa $14 billion of customer cash Computershare generates net interest margin on stands to benefit from rising interest rates, leading to increased earnings over time.
Acquisitions
To combat dwindling growth, Computershare's management has also invested into mortgage administration businesses by announcing two potential acquisitions. These deals, if they proceed, should diversify Computershare's earnings base further and provide EPS growth in the next financial year.
Foolish takeaway
Investing in shares requires one to look past the present and into the future; with that in mind, whilst Computershare's first-half results disappointed, its future looks bright as the company focuses on organic growth opportunities within the mortgage servicing space. Computershare also stands to benefit from the macroeconomic tailwinds of a lower Australian dollar and rising global interest rates, meaning most of its downside risk should be reflected in the current price.
Accordingly, with Computershare trading ex-dividend on 18 February, investors may want to take another look at this stock before then.
