Computershare focuses on core business
The sale of low-returning U.S. mortgage servicing unit heightens focus on core register maintenance and records management business.
Mentioned: Computershare Ltd (CPU)
The sale of wide-moat Computershare's (ASX: CPU) noncore U.S. mortgage servicing business, or CLS U.S., is a positive development acoording to Morningstar Equity Analyst Shaun Ler. Mortgage servicing is the only unit within Computershare that consistently incurs losses at the earnings before interest and taxes (“EBIT”) level, excluding margin income.
The sale will release capital for higher-returning investments, enabling management to strengthen the moat of its core businesses: share registry, employee share plans, and corporate trust. CLS U.S. will be sold to Rithm Capital, an asset manager focused on real estate and financial services sectors. We expect the sale will be completed by management's fourth quarter of fiscal 2024 estimate.
This transaction is inconsequential to Ler's $25 fair value estimate and shares are trading broadly in line with our intrinsic assessment. Gross sales proceeds of US $720 million, or roughly US $530 million after taxes and fees, slightly exceed our implied aftertax valuation of around US $470 million for CLS U.S. on a net basis.
Ler had previously forecast CLS U.S.’ losses to reduce significantly at the EBIT level, excluding margin income, in fiscal 2025, through cost-cutting and as macroeconomic conditions slowly improve. However, execution risks are high. The announced sale offers shareholders swift monetization of the asset and reduces future uncertainties. There are undisclosed remnant expenses, though they are expected to be offset by likely benefits of Computershare’s transitional services agreement with Rithm and further cost-reduction plans. We estimate the remnant expenses need to amount to about US $200 million in total for our fair value to reduce by 10% but such a quantum is unlikely.
The sale of CLS U.S. is expected to lift Computershare’s operating margins to 38% per year, on average, over the five years to fiscal 2028—above our prior forecast of 35%. Proceeds from the sale will support complementary acquisitions, organic growth investments, and shareholder returns including the $750 million buyback.
Computershare's wide moat
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.
Ler assigns Computershare a wide moat rating. The firm’s diverse set of services—built up by acquisitions and supported by its superior technology—establish switching costs for its clients and facilitate cross-sell 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, or ROIC.
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.