Computershare (ASX:CPU)

Stuart Irving
CEO & President
Market Cap (AUD): 7.86B
Sector: Information Technology
Last Trade (AUD): 14.48 +0 (+0%)
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1. About

Since Computershare was established in Melbourne in 1978, its operations have expanded across five continents. The Company gains unique insights from around the world, integrating best practice and innovative developments to strengthen its competitive advantage and deliver market leading solutions for high integrity data management, high volume transaction processing and reconciliations, payments and stakeholder engagement.

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 its long standing, trusted relationships with third parties and advisors, forged from more than 30 years’ experience in financial markets across the world. 

Computershare's global footprint means it has the economies of scale to maintain robust compliance, audit, risk, anti-fraud, disaster recovery and business continuity planning programs – offering peace of mind to our clients and their customers.

2. Business model

 

The Company operates the following divisions:[1]

 

Divisions

Revenue ($000)

% of Revenue

% of Profit (before Int, Tax, Depn & Amort)

Profit drivers[2]

Asia

$161,481

6.3%

9.0%

  • Business services revenue grew 11.0% on FY2017 to become the largest business stream by revenue, delivering $872.0 M in constant currency terms. The improvement was driven largely by the ongoing growth in its US mortgage servicing division and some large events benefiting the class actions business. Growth was also achieved in corporate trust and the deposit protection scheme
  • Business services EBITDA grew 35.4% year-on-year on a constant currency basis to $233.7 M
  • Revenue in the investor services business improved by 3.8% in constant currency terms, benefiting in particular from a 26.2% improvement in corporate actions revenue to $158.7 M following the cyclically depressed prior period. While register maintenance revenues were down slightly by 0.2% to $696.6 M, the business saw an improving trend with an encouraging return to organic growth in the second half of the year
  • At the EBITDA level, the consolidated investor services business increased by 9.7% over FY2017 on a constant currency basis with improving margins underpinned by strong cost management

Australia & New Zealand

$242,869

9.5%

5.5%

Canada

$183,184

7.2%

13.0%

Continental Europe

$106,755

4.2%

3.0%

Technology & Other

$263,708

10.3%

2.7%

UCIA

$484,606

19.0%

16.0%

United States

$1,108,564

43.5%

50.2%

3. Strategy

 

Key strategies include[3]

 

  • Computershare’s strategy is to be the leading provider of services in its selected markets by leveraging its core skills and competencies to deliver outstanding client outcomes from engaged staff. The Company focuses on new products and services to reinforce its leadership in established markets, and invest in technology and innovation to deliver productivity gains and improved cost outcomes
  • The Company is currently focused, in particular, on driving growth in its mortgage services business by building out its revenue model across the mortgage value chain together with integrating the large UKAR book of business in the UK. In its other growth engine, employee share plans, the Company is now focused on closing the recent Equatex acquisition which the Company expects will enhance its scale, capabilities and earnings
  • The Company also has a range of strategies to enhance profitability underpinned by its cost-out programmes where the Company has been executing strongly, to return its registry maintenance business to organic growth and increasing its exposure to improved margin income as the interest rate environment normalises.
  • Its capital management strategy aims to advance returns for shareholders. The Company consistently generates strong free cash flow and the Company uses this to fund its growth engines, technology initiatives, and strategic investments, and in recent times the Company has also been able to reduce debt, buy back shares and increase dividends. The Company takes a conservative stance to debt leverage, with a target range of 1.75x to 2.25x net debt to EBITDA (excluding non-recourse SLS advance debt).
  • Its strategy is to be the leading provider of services in its selected markets by leveraging its core competencies to deliver outstanding client outcomes from engaged staff
  • The Company focuses on new products and services to reinforce market leadership in established markets and invest in technology and innovation to deliver productivity gains and improve cost outcomes

4. Markets

 

The Company operates in markets including:[4]

 

Industry (Australia)

Industry Revenue

Growth Rate

Custody, Trustee and Stock Exchange Services

$15 billion (2018)

1.6% (annual 14-19)

Professional Services

$157 billion (2017)

1.6% (annual 13-18)

Computer System Design Services

$54 billion (2018)

3.0% (annual 14-19)

5. Competition

 

Major competitors Include:[5]

 

  • Dst Systems, Inc.
  • Finastra Group Holdings Limited
  • Precisionir Group

6. History

 

1978[6]

Founded in Melbourne, Australia

 

1994  

Lists on the ASX

 

1995  

Entered UK market

 

1997  

Entered New Zealand market

 

1998  

Acquired Royal Bank of Scotland's transfer agency business, enters South African market, entered Irish market

 

1999  

Entered Hong Kong market

 

2000  

Entered US, Canadian markets and offered corporate trust, escrow, and debt management services

 

2001  

Entered German market

 

2003  

Entered Russian market, Acquired Georgeson

 

2004  

Entered Indian market

 

2005  

Entered Japanese market

 

2007  

Entered tenancy deposits market.,

Acquired VEM Aktienbank AG, a German corporate actions bank

 

2008  

Acquired Australian customer communication solutions company QM Technologies,

Acquired Busy Bees, a childcare voucher administration business (UK)

Increased ownership of the NRC investor services business (Russia)

 

2009  

Acquired Investor, an investor services business and entered the Danish and Swedish markets, Acquired National City, an investor services business (US), Acquired Kurtzman Carson Consultants LLC, a bankruptcy administration business

 

2010  

Acquired the Employee Equity Services business of HBOS, making Computershare the market leader for plan administration services (UK)

 

2011  

Entered the Italian market, Acquired Serviceworks Group (AU), a utility back-office administrator, Acquired Specialized Loan Servicing LLC (US), a mortgage loan service provider

 

2012  

Acquired Shareowner Services business of Bank of New York Mellon

 

2013  

Acquired Morgan Stanley Global Share Plans Solutions business (Europe), Acquires Olympia Corporate and Shareholder Services assets from Olympia Financial Group Inc. (Canada)

 

2014  

Acquired Registrar and Transfer Company (USA)

Acquired Homeloan Management Limited (UK), a mortgage loan service provider

 

2015  

Computershare Limited had agreed terms for the acquisition of Valiant Trust Company assets from Canadian Western Bank for a maximum consideration of CAD 33 million should revenue retention thresholds be met

 

2016  

Acquired Capital Markets Cooperative and Altavera Mortgage Services (US)

 

2017  

Computershare Limited announced that it has agreed to sell its 50% interest in its Indian venture Karvy Computershare Private Limited to General Atlantic

 

2018  

CPU to buy Equatex – a leading European share plans business

CPU assigned credit ratings by S&P and Moody’s

7. Team

 

Board of Directors[7]

 

Simon David Jones – Chairman

Stuart Irving – Chief Executive Officer and President

Christopher John Morris – Non-Executive Director

Abigail Cleland – Non-Executive Director

Tiffany Fuller – Non-Executive Director

Lisa Gay – Non-Executive Director

Penelope Jane Maclagan – Non-Executive Director

Arthur Leslie Owen – Non-Executive Director

Dr. Paul Reynolds – Non-Executive Director[8]

Joseph Velli – Non-Executive Director

 

Management Team

 

Global Senior Executives

 

Stuart Irving – Chief Executive Officer and President

Mark Davis – Chief Financial Officer

Mark McDougall – Chief Information Officer     

Mike Anson – Chief Risk Officer

Peter Belval – Chief of Staff

Scott Cameron – Regional Director, Computershare Australia, and New Zealand

Francis Catterall – Chief Corporate Development Officer

Samantha Coggins-Thompson – Chief Audit Executive

Paul Conn – President, Global Capital Markets

Steffen Herfurth – Group Regional Director, Computershare Continental Europe

Dominic Horsley – Group Company Secretary and Chief Legal Counsel, Asia Pacific

Lucy Newcombe – Director, Corporate Communications

Nick Oldfield – Chief Executive Officer, Computershare Loan Services USA, and Chief Financial Officer,  Computershare USA

Steve Rothbloom – President, ComputerShare USA

Naz Sarkar – Chief Executive Officer, ComputerShare United Kingdom, Channel Islands, Ireland, and Africa

Stuart Swartz – President, ComputerShare Canada

Craig Thomas – Chief Security and Special Projects Officer

Chee Ping (CP) Yap – President & Chief Executive Officer, ComputerShare Asia

 

Australia and New Zealand Management Team

 

Scott Cameron – CEO, Australia & New Zealand

Anna Papile – Head of Project Management Office

Craig Manson – Managing Director, ComputerShare Communication Services

David Hynes – Managing Director, Computershare Utility Services – Global Chairman, ComputerShare Communication Services

Dominic Horsley – Chief Legal Counsel – Asia Pacific & Group Company Secretary ComputerShare Limited

Greg Dooley – Managing Director, ComputerShare Investor Services (Australia)

Hilton Galgut – Chief Financial Officer

James Marshall – Managing Director, Computershare Plan Managers

Matthew Garvan – Director of Operations

Robert Kimber – Managing Director, Computershare Technology Services, Oceania

Roslyn Brierley – General Manager, Human Resources

Ryan Wade – Managing Director, Georgeson

Stuart Jury – Managing Director, Computershare Investor Services (New Zealand)

Tara Reid – Head of Marketing & Sales Support


read more

8. Financials

 

2018 Full Year Results Presentation

 

Financial Year 2017/18 (ended 30 June):[9]

 

Divisions

Revenue ($’000)

% Change

Profit (before Int, Tax, Depn & Amort) ($’000)

% Change

Asia

$161,481

13.2%

$55,868

14.4%

Australia & New Zealand

$242,869

(3.7%)

$34,479

(9.5%)

Canada

$183,184

7.2%

$81,029

6.7%

Continental Europe

$106,755

14.2%

$18,807

(7.4%)

Technology & Other

$263,708

17.4%

$16,979

(18.0%)

UCIA

$484,606

7.9%

$103,519

21.0%

United States

$1,108,564

11.1%

$312,645

26.3%

Total

$2,551,167

9.5%

$623,326

16.1%

9. Risk

 

Major risks include:[10]

 

Strategic and regulatory risk

Its businesses operates in highly-regulated markets around the world and its success can be impacted by changes to the regulatory environment and the structure of these markets. As an organisation the Company pay very close attention to regulatory developments globally and play an active role in consulting with regulators on changes which could impact its business. Many of its key businesses are also subject to direct regulatory oversight and the Company is required to maintain the appropriate regulatory approvals and licenses to operate, and in some cases adhere to certain financial covenants (such as capital adequacy). Computershare has robust compliance management and monitoring programs in place to support these regulatory obligations. In the course of its business, Computershare’s mortgage servicing business purchases Mortgage Servicing Rights (MSR) in order to service a group or portfolio of mortgages. Interest rate volatility creates risk related to the market value of the MSR assets and ability to generate revenue. Its business is also at risk of disruption from new technologies and alternative service providers. This means the Company must be looking constantly for ways to improve its services by investing in new technologies and processes. The Company have a dedicated innovation team which is responsible for rapidly assessing the viability of new business ideas and initiatives in an agile yet systematic manner using proven innovation techniques.

In recent periods the Company has seen the emergence of distributed ledger technology or ‘blockchain’, which has the potential to be deployed across financial market systems, including post-trade clearing and settlement of securities. Deployment of distributed ledger technology into financial markets, if it ultimately proves to be a viable option, will require extensive dialogue and consultation with regulators and industry participants and its ultimate market structure implications are not yet known. Computershare is adopting a measured and considered approach to blockchain. The Company is pursuing a dual-track approach in terms of assessing the commercial value of introducing innovative blockchain services in market adjacencies, while also rigorously defending its existing role and overall market positioning. The Company also believes that its global presence makes us an attractive partner to blockchain solution providers and gives us access to a wide range of potential commercial blockchain opportunities. The Company has also made a strategic investment in SETL, a company which is a leading provider of blockchain solutions to financial markets globally. Its future prospects also depend on finding and executing on opportunities to grow and diversify its business. The Company are potentially constrained by market structure restrictions from significantly growing its registry services footprint by acquisition (unless subsequent market structure changes present new opportunities) and this has inevitably changed the focus of its investment decisions. There is also inherent risk in any acquisition, including risk of financial loss or missed earnings potential from inappropriate acquisition decisions as well as integration risk in its implementation. Computershare has a strong track record of acquiring and integrating businesses successfully, in particular in the businesses of registry and employee share plan administration. The Company has a deliberately focused acquisition strategy with rigorous approval processes, and the Company also undertakes subsequent reviews of its acquisitions and their performance. Computershare also operates across a diverse set of countries and tax jurisdictions. The tax environments in these jurisdictions can be complex and subject to change and these changes cannot be accurately predicted. Computershare operates a global finance function to manage tax risk within the Group’s risk appetite and engages external tax advice as appropriate.

 

Operational risk

Computershare deals with a high volume of daily transactions which can be exposed to data loss and security breaches. The nature of cyber-crime is constantly changing and information systems are vulnerable to cyber-attacks. Security breaches may involve unauthorised access to Computershare systems and databases, damage to Computershare’s systems and the exposure and/or theft of confidential client data. This presents a range of challenges, from ensuring the security and integrity of that data as well as the continuity of its service in the face of internal and external factors. The Company manages these risks through extensive business continuity planning and testing as well as rigorous internal controls around the ability to access and modify client data. The Company also makes significant investments in technology and services to protect data at rest, in motion and at endpoint, including a specialist information security team whose responsibilities include ensuring the Company has appropriate and effective systems in place to protect its and its clients’ data from unauthorised access. Its dedicated financial crime team is also responsible for analysing information and transactions to mitigate the risk of fraud (both internal and external), and these resources are focused on areas of highest potential exposure. Computershare also undertakes high volumes of transactional processes, some of which are complex. There is a risk that failure to process these transactions correctly could result in liabilities being incurred to third parties. The Company invests significantly in technology to automate processes where possible. The Company also has policies, processes, and corresponding controls to assist in mitigating this risk, which is routinely tested. The Group also maintains insurance.

 

Financial Risk Factor

  • Interest rate risk

Interest rate risk arises from the possibility that changes in interest rates will affect future cash flows or fair values of financial instruments. The consolidated entity is exposed to interest rate risk through its primary financial assets and liabilities and as a result of maintaining agent and escrow agent bank accounts on behalf of clients. Given the nature of the client balances, neither the funds nor an offsetting liability are included in the Group’s financial statements. Average client balances during the year approximated $17.0 billion (2017: $16.7 billion) and in relation to these balances, the consolidated entity has in place interest rate derivatives totaling $1.0 billion notionally (2017: $1.8 billion).

 

  • Foreign exchange risk

Foreign exchange risk arises from future commercial transactions and recognised assets and liabilities denominated in a currency that is not the relevant entity’s functional currency. Entities within the Group typically enter into external transactions and recognise external assets and liabilities that are denominated in their functional currency. Whilst a number of entities within the Group hold bank account balances in a currency which is not their local functional currency, these balances do not expose the Group to significant foreign exchange risk. Foreign exchange risk also arises from net investments in foreign operations held in Europe, Canada, South Africa, and Asia Pacific. Accordingly, the Group’s financial position can be affected significantly by movements in the relevant currency exchange rate when translating into the consolidated entity’s presentation currency, the United States dollar. The consolidated entity also has debt that is designated as a hedge of net investment in foreign operations. On consolidation, any foreign exchange gains or losses on these balances are transferred to the foreign currency translation reserve.

 

  • Credit risk

Credit exposure represents the extent of credit related losses that the consolidated entity may be subject to on amounts to be received from financial assets, which include receivables, cash, and cash equivalents and other financial instruments. The consolidated entity, while exposed to credit related losses in the event of non-payment by clients, does not expect any significant clients to fail to meet their obligations. The Group’s trading terms do not generally include the requirement for customers to provide collateral as security for financial assets and consequently, the consolidated entity does not hold any collateral as security. The consolidated entity’s exposure to credit risk is as indicated by the carrying amounts of its financial assets. Concentrations of credit risk exist when clients have similar economic characteristics that would cause their ability to meet contractual obligations to be similarly affected by changes in economic or other conditions. The consolidated entity’s concentration of credit risk is minimised due to transactions with a large number of clients in various countries and industries. The registry and plans sector transact with various listed companies across a number of countries. The consolidated entity does not have a significant exposure to any individual client apart from its contract with UK Asset Resolution Limited, a UK government entity. Transactions involving derivative financial instruments are with counterparties with whom the Group has signed International Swaps and Derivatives Association agreements and who maintain sound credit arrangements. To supplement credit ratings of counterparties the Group has a Board approved policy on managing client balance exposure.

 

  • Liquidity Risk

Liquidity risk management implies maintaining sufficient cash and the availability of funding. The Group has staggered its various debt maturities to reduce re-financing risk. Whilst impacted by acquisitions from time to time, the Group maintains sufficient cash balances and committed credit facilities to meet ongoing commitments.

References

  1. ^ Annual Report 2018, P 68
    https://www.listcorp.com/asx/cpu/computershare/news/annual-report-2018-1976157.html
  2. ^ Annual Report 2018, P. 21
    https://www.listcorp.com/asx/cpu/computershare/news/annual-report-2018-1976157.html
  3. ^ Annual Report 2018, P. 23
    https://www.listcorp.com/asx/cpu/computershare/news/annual-report-2018-1976157.html
    Investor Presentation 2018, P.02
    https://www.listcorp.com/asx/cpu/computershare/news/clsa-investors-forum-2018-presentation-1972695.html
  4. ^ http://www.ibisworld.com.au/industry/default.aspx?indid=530
    http://www.ibisworld.com.au/industry/default.aspx?indid=1750
    http://www.ibisworld.com.au/industry/default.aspx?indid=5580
  5. ^ http://www.hoovers.com/company-information/cs/company-profile.computershare_limited.dc1735efdcd37942.html
  6. ^ http://www.computershare.com/corporate/about-us/who-we-are/our-story
    https://www.listcorp.com/asx/cpu/computershare/news/sale-of-50-percentage-interest-in-karvy-computershare-1651179.html
    https://www.listcorp.com/asx/cpu/computershare/news/cpu-to-buy-equatex-a-leading-european-share-plans-business-1886624.html
    https://www.listcorp.com/asx/cpu/computershare/news/cpu-assigned-credit-ratings-by-s-and-amp-p-and-moodys-1892859.html
  7. ^ http://www.computershare.com/au/meet-the-team
  8. ^ https://www.listcorp.com/asx/cpu/computershare/news/appointment-of-non-executive-director-1990360.html
  9. ^ Annual Report 2018, P 68
    https://www.listcorp.com/asx/cpu/computershare/news/annual-report-2018-1976157.html
  10. ^ Annual Report 2018, P 23, 24, 78-79
    https://www.listcorp.com/asx/cpu/computershare/news/annual-report-2018-1976157.html