All good things come to an end

by | Mar 16, 2012 | Business

Standing his ground ... Computershare chief executive, Stuart Crosby.

Standing his ground … Computershare chief executive, Stuart Crosby. Photo: Jessica Shapiro

In the tradition of one of the great banking lurks – cheques taking five days to clear – the share registry company Computershare has long enjoyed a nice little earner from interest on monies held in trust.

It sits on funds from assorted floats and other market issues for as long as it can, worldwide, while the interest income trickles steadily into its accounts – to the tune of $89 million for the latest half year.

Unfortunately for Computershare, though perhaps fortuitously for retail investors, the grocery juggernaut Woolworths may have called time on this “margin income” ploy.

Woolworths apparently told Computershare when negotiating its recent bond issue that the interest on investor funds should be remitted to investors themselves.

And although the Computershare chief executive, Stuart Crosby, depicted the Woolies negotiation as a ”one-off” at the half-year analyst briefing, BusinessDay hears that ANZ insisted on the same deal for its latest note issue.

The ramifications may be material. Revenue last year was $1.6 billion, of which $172 million, or 10.8 per cent, related to interest earnings on monies held in trust.

On that revenue, Computershare generated earnings before interest and tax (EBIT) of $368 million and earnings before interest, tax, depreciation and amortisation (EBITDA) of $494 million.

It is reasonable to assume that this interest income costs very little to generate – which also goes to the point that this lurk is too good to last – so, while it only made up 10.8 per cent of revenue, it constituted an ample 35 per cent of EBITDA and an even larger 46 per cent of EBIT.

As depreciation and amortisation have precious little impact on the bank account, EBIT is arguably a more pertinent measure.

Responding to questions yesterday, a spokesman declined to talk about clients except to say that in the case of Woolworths, ”we were compensated appropriately for the work we undertook”. He also said that from a group perspective ”margin income is not material in the southern hemisphere”. Fee income made up for margin income, he said.

Further, total balances during the first half were more than $US12 billion ($11.4 billion), of which Australia accounted for only 5 per cent.

Be that as it may, as cash rates in Australia at 4.64 per cent were a multiple of the 0.25 per cent in the US during the half and far higher than in other places such as Britain, it is logical that returns would also have been superior. That contribution to profit would be even more pronounced as interest rate hedges rolled off in each year.

Still, Computershare has been a smash hit with the investment community and enjoys a diversity of revenue streams.

Although sapped by falling transaction income in latter years, as with any market-sensitive business, analysts have mostly kept their ”buy” recommendations, especially since the $550 million acquisition of Bank of New York Mellon’s registry operation, and its forecast $US72.5 million in synergies that should catapult the group into clear first place in the North American market.

The stock has ticked up of late in anticipation transactions and volumes might match the rise in share prices. If that keeps going and transaction revenue cuts in once again, it may counter the damage to margin income.

It is a considerable irony though that Computershare has been one of Australia’s great technology success stories because technology also seems to be its most formidable challenge now.

Already, at least one client has said, ”We’ll pay you the day before you pay them. We are not giving you cleared funds just to sit on.”

The back office revolution that enabled Computershare to amass a global registry business – and charge per month, per shareholder for an array of services – will not be outsourced to India in a blink but it can now be comfortably done in-house.

Email means stamps no longer have to be licked. Teleconferencing means the obligatory cucumber sandwiches no longer have to be served at old-style shareholder meetings. Electronic payments systems mean no more waiting for the cheque to clear.

What was once a cottage industry before the Computershare founder, Chris Morris, rationalised it world-wide may return, paradoxically, in a 30-year cycle to a cottage industry once again.

The group’s expansion into proxy solicitation and other services is a good thing then, and there will be no sudden move by corporations to bring in-house what was once better outsourced. But it can now be done, and that is the big risk.

The same dilemma confronts Computershare’s great rival Link Group, and its Link Market Services, which the buy-out group Pacific Equity Partners has been trying to sell for some time.

Apart from the odd float rumour planted in the press to test the market appetite for a float, valuations have been mooted around $1.4 billion for Link. There was even the recent humorous suggestion of a game of pass the parcel as, the story claimed, ”Bain, Blackstone, KKR and TPG have communicated their interest in the company, sources said”.


Michael West

Michael West

Michael West established to focus on journalism of high public interest, particularly the rising power of corporations over democracy. Formerly a journalist and editor at Fairfax newspapers and a columnist at News Corp, West was appointed Adjunct Associate Professor at the University of Sydney’s School of Social and Political Sciences. You can follow Michael on Twitter @MichaelWestBiz.

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