Morningstar | Higher Profit Margin Forecasts Drive Computershare FVE Increase to AUD 19.00.
We expect narrow-moat-rated Computershare to benefit from further interest rate rises as Western countries' central banks increase rates from post global financial crisis lows. Computershare earns interest on client-owned cash balances, or margin income, which comprises around one third of group EBITDA and is highly sensitive to interest rate movements. The company doesn't disclose the profit margin earned on margin income, but we expect it is close to 100% and that further interest rate rises will drive stronger margin expansion than we previously expected. Computershare is mainly exposed to the United States, Canadian, and Australian dollars, as well as to the British pound, and we estimate a 1% change in interest rates causes a 20% change in EBIT.We have increased our fair value estimate by 37% to AUD 19.00 per share, which primarily reflects an increase in our profit margin forecasts, and we now believe the shares are undervalued. Our revenue forecasts are largely unchanged, but our long-term EBITDA forecasts have increased by 21%. We assume a long-term weighted average base interest rate of the four main currencies to which Computershare has exposure, the AUD, USD, GBP, and CAD, of 2.75% versus 1.06% in fiscal 2018. This long-term rate is consistent with the implicit risk-free rate used in our cost of equity. As such, we now forecast an underlying EPS CAGR of 7.1% over the next decade versus 4.8% previously. Our fair value estimate implies a fiscal 2019 P/E, ratio of 17.8, versus 16.5 at the current market price of AUD 17.57, and a one-year forward P/E range of 12 to 22 over the past five years.
Computershare is engaged in the operation of investor services, which provides registry maintenance and related services; plan services, which provides administration and related services for employee share and option plans; communication services, which comprise document composition and printing, intelligent mailing, among others; business services, which provides bankruptcy, class action and utilities administration services, voucher services, corporate trust services and mortgage servicing activities; stakeholder relationship management services, which provides investor analysis, investor communication and management information services; and technology services.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
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