Global share registry and financial services company, Computershare has joined the growing list of companies forced to cut 2019-20 earnings guidance by the worsening economy (especially lower official interest rates) and the swelling uncertainty caused by the coronavirus.
That saw the company’s shares add to the big losses of the three weeks or so. The shares closed down 4% at $11.35. The shares have fallen more than 17% in the last five trading days.
The broader market lost 3% in another day of bloodletting.
Computershare chief executive Stuart Irving told investors and analysts that while it had been expecting interest rates to fall in Australia and the UK, the 50 basis point cuts in the US and Canada last week – in reaction to fears about the economic impact of the coronavirus – “were not anticipated.”
Up until last week, our confidence levels were high on meeting guidance,” he said.
The major driver was the rapid change in interest rate expectations for the remainder of the 2019-20 financial year which have also fallen below what the company was forecasting.
Last month, Computershare had been guiding the market for a 5% decline in underlying EPS (earnings per share) for the financial year, its preferred earnings measure. Now that is a 15% drop.
The company makes money on the margin income it obtains from its cash deposits (money to be paid out on behalf of its clients as shareholder dividends).
Computershare provides stock registration and transfer services to listed companies and handles the dividend and other distributions on behalf of dozens of companies.
Bloomberg reports claim that more than 50% of Computershare’s cash on hand is US dollars and the surprise 0.50% interest rate cut from the Federal Reserve a week ago Tuesday was unexpected and triggered the downgrade.
“Every 25 basis point fall in interest rates could trim $16 million from annualised EBITDA (earnings before interest, tax depreciation and amortisation) on exposed non-hedged balances,” said Bloomberg Intelligence (according to media reports yesterday).
Computershare said its earlier guidance assumed margin income revenue for the 2019-20 financial year would be down around 8% to 10% compared to 2018-19. That figure is now expected to be a nasty 25% slump $185 million.
Computershare said the impact has been cushioned by the $5 billion of long-term deposits it holds which are not exposed to short-term rate movements.
It said margin income for 2020-21 is expected to be around $115 million and “modestly lower” the following year, as term deposits roll off and become exposed to short-term interest rates.
“While we are downgrading 2019-20 earnings, I am sure many of you will be positively surprised by our margin income outlook for 2020-21 and 2021-22,” said Mr. Irving. “Even at these low rates, we still expect to generate significant margin income revenues.”
Investors are clearly aware of Computershare’s sensitivity to interest rate changes as the company’s share price has slumped 35% in less than a month.
