Today we will open a position in Computershare (CPU). Most investors would be familiar with CPU as a provider of share registry services, but they do so much more. They also manage employee equity plans, proxy solicitation, and loan/mortgage services.
There are a couple of reasons why we like CPU. Firstly, CPU clip the tick on every transaction in the share registry services business. Whenever you receive a dividend payment or participate in a rights issue or entitlement, CPU charges individual companies a fee for managing the process on every transaction.
Secondly, and most importantly, CPU holds significant fiduciary cash balances. The company holds funds while they wait for the amounts to be paid out to the end beneficiary. These funds are like the free float of an insurance company. On these funds, CPU can keep the interest generated. As Covid hit, global interest rates fell to zero in every major economy except China.
Now that interest rates are rising globally, as central banks try to combat rising inflation, the interest CPU generates on these cash balances is increasing again.
CPU calculated that a 100bp increase in the average interest rates it receives translates into an EPS benefit of 26c. The US federal reserve has already raised rates to a target range of 1.5-1.75%. In addition, June’s latest monthly inflation report showed US inflation hitting a 40-year high of 9.1%. So, interest rates are going higher, and CPU are beneficiary of this.
In summary, with CPU, you get an increasing earnings outlook, and a currency tailwind from the falling AUD/USD exchange rate (majority of earrings are in USD). On a technical basis, you get one of the few charts in this market that still looks to be trending higher.
Overall, the market is still very nervous, with no standout sector outperforming over the last month. In fact, there aren’t any sectors that are looking remotely positive, so, the health and breadth of the market remains underwhelming. Given that, we remain heavily in cash, waiting for opportunities to present themselves.
TRADE ACTION
Number of shares: 300
Buy up to: $25.20
Stop Loss: $22.50
Profit Target: $29.00