Can rising interest rates pushes Computershare to new record highs?

After struggling through much of last year for the market’s attention, the 16% rise in in the share price of technology and financial services provider Computershare Limited (ASX: CPU) since late September 2021, reflects mounting evidence that interest rates, notably in the US are on the rise.

With around 52% of revenue and 55% of the company’s earnings based in the US, it’s easy to see why investors’ have hitched the company’s fortunes to interest rate sentiment emanating from the US Federal Reserve (The Fed).

While clearly not welcomed by all sectors, hints by the Fed’s chair Jerome Powell, that interest rates could be hiked up even faster than previously estimated, is music to the ears of Computershare and its shareholders.

New Year – different story

Unsurprisingly, rock-bottom interest rates and US restrictions on mortgage foreclosures underscored a severe hit to the company’s bottom-line, with net profit after tax down -18.8% over the year to $189m.

Adding to the company’s US-based woes last year, the company mortgage service revenues slid on the back of the US-nationwide foreclosure moratorium. 

While Computershare did report some revenue growth in some key business areas last year, the rot set in due to cuts in interest rates as global central banks straddled the global pandemic.

Sweet spot

What a difference a new year makes: The company is now in the sweet spot of rising rates, and investors appear to be showing greater interest in the stock.

Instead of suffering from higher interest rates, as do most tech companies, Computershare benefits from the margin income the company earns on cash held on behalf of its share registry clients before dividends and other distributions are paid to the clients’ shareholders.

Rising interest rates also bode well for Computershare’s fairly recent acquisition of Wells Fargo Corporate Trust Services – renamed Computershare Corporate Trust – which is expected to expand the company’s US corporate trust business.

At time of purchase last year, the US$750m acquisition was expected to add at least 15% to pro forma earnings per share (EPS).

Is there more upside to come?

While Computershare’s share price currently exceeds the previous high of $19.75 in September 2018, the jury’s out on whether they will continue rising in light on the strength of rising interest rates.

From a chart perspective, Computershare is trading above its 20-day simple moving average, and this is considered to be the sign of a bullish trend. There is added weight to this indication with the rising moving average indicating buying interest in this stock.

Computershare provided a fairly nondescript financial disclosure review just before Christmas and offered up neither commentary on current trading nor any changes to outlook and guidance.

As a result, the company’s first half results, due out February 9, should provide some valuable insights into how the company is fairing both locally and in the US.

What brokers think

• Ord Minnett is not only looking forward to the half year result, the broker has also updated its assumptions and modelling. The Lighten rating – aka expensive – is retained and the target price rises to $17.24 from $15 (14/1/22).

• Morgans has issued no changes to Computershare's earnings forecasts and retains the Hold rating with the target price increasing to $18.82 from $17.52 (12/1/22).

• Morgan Stanley’s Overweight rating and $21.50 target price are unchanged (26/11/21).

• Macquarie’s Outperform rating and $22 target price retained (11/11/21).

Based on Morningstar’s fair value (4/1/22) of $18.61, the stock looks to be overvalued.

Consensus on Computershare is Hold.

Computershare six month share price performance versus the ASX 50