Computershare

This stock is down 50%, and the company has a high market share in a stable industry.  But after looking, I don't plan to buy it anytime soon.  Its an interest rate play.

Computershare is an ASX-listed multinational who does paperwork and record keeping for companies.

Their main businesses are:

• Register maintenance: Performs record keeping to maintain the shareholder registries for listed companies, allowing shareholders to be directly registered.  This is a niche activity that the companies do not want to perform themselves.  They have a high market share: A 2015 report gives them 77% of the Dow and 62% of the S&P500 companies, 58% of the ASX200, and 62% in Canada.
• Record keeping for Corporate Actions (eg: dividends, stock splits, company mergers)
• Business Services: Record keeping for various businesses: Mortgage Services (eg: debt management, customer servicing, property appraisal, IFRS 9 compliance), Tenancy Deposits, UK Voucher services (childcare vouchers), US Chapter 11 bankruptcy, Specialised Loan Services (distressed loan servicing - they do take some loan risk (p12))

These are really boring record-keeping jobs handling government regulation and paperwork.  Most should be stable, some may have a cycle (eg: mortgages, bankruptcy).

I became interested in them because of their high market share in the register maintenance business, and EBIDTA margins in the high 20s.  Morningstar gave them a narrow moat.  The key question now is: how cyclical are their earnings?

Cyclicality and Interest Rates

They say that most of their revenue is recurring:

Source: 2019 AGM (p12)

How did they perform in the GFC?  Between 2H08 and 2H09, revenue dropped 13%, but profit dropped 45%.  The stock price halved.

The main profit driver is interest rates.  Operating profit shot up in 2016 and 2017:

Due to higher interest rates:

Source: Fred economic data

This is confirmed by management:

Source: April 7th 2020 presentation

Management estimates interest margin revenue at 100m in FY 2021 above.  I estimate thats a 120-150m  drop in operating earnings from FY2019 levels if rates stay at current levels  (1) (2) (3).  Thats an annual operating profit of 150-180m (USD 27-33c per share), all other things being equal.

Or a 150-170m drop if rates go to zero.  So an annual operating profit of 150-120m (USD 22-27c per share).

Part of the business is counter cyclical.  See the spike in 2009 Corporate Actions revenue below:

And bankruptcies.  The last bar in the chart is for 3 months - they had cases at the same rate as in the GFC!  Shit, this is chilling.  The only saving grace is the US bankruptcies are fast, and the companies may keep operating many without job losses.

So if the current recession is like 2008, they could have a spike in additional revenue/profits (assuming all costs are fixed) of 110m from capital raising (USD 20c/share in one year) and 100m from bankruptcies (USD 18c/share spread over 2 years).

It is hard to estimate the effects of the downturn on this business.  Management provides hints, but they give different numbers (eg: revenue, income) for different segments of the business which make it hard to reconcile.  

In April, management estimated a 20% drop in EPS for FY 2020.  Since FY2020 ends in June, thats a 20% drop for 3 months of the year!  So are we looking at a 80% drop for the entire year?  Or more, with operating leverage?

The Numbers

Balance sheet is OK.  800m current liabilities, against 500m cash.  Long Term debt around 1.9bn (includes leases).  420m in FY 2019 earnings. Finance costs were only 67m.   My guess is that they can survive without raising more capital, as the majority of their non-interest revenue is recurring.

But they are very operationally leveraged.  If all their costs are fixed, a 17% reduction in revenue takes their profits to zero.

A quick look at long-term cashflows.  The invest significantly, most years investing 20-50% of their CFO.  Most of that is on acquisitions - they are "serial acquirers":

Their long term business model seems to be to use the cashflows generated from the stable registry business to acquire related companies.  I can't tell whether these acquisitions have led to greater profits.  Because I can't back out the effects of interest rates from the profits.

Earnings are too variable to value this stock based on earnings.  I can't calculate a price at which I would catch a "falling knife".

Conclusion

I thought this was a simple company with a nice story.  But it turned out to be complex due to the high dependency on interest rates, different business segments, and the different numbers that management gives.

The key is interest rates.  The best way to play this is to wait till interest rates are expected to go up.  Thats a loooong way from now.  In the previous cycle this was 4Q2016, after Trump was elected and growth/inflation expectations stayed high for several years.

Would I buy this in the middle/end of a market crash as a high quality stock to hold in a recovery?  Probably not.  In the 2009 to 2015 recovery, it was up 100%.  But SPY rose a lot more.

Misc

They only report their financials twice a year.

Their end of financial year is end-June.