BUILDING COMPUTERSHARE FOR THE NEXT STAGE OF GROWTH
Computershare has been run, since the mid-1990s when it first ventured overseas, as a regional business model, with some global shared services, and our reporting focused on country-by-country breakdowns.
During the last 18 months we have been looking at ways to work smarter, intensify our customer focus, identify opportunities for new business and, importantly, build out additional products. At times the regional model has restricted us, so we have moved to an entirely new management structure aligned around complementary products in the group, designed to enable the next phase of growth. (Please note, this will bring changes in our segment reporting from FY2020, but not in this report.)
We design and execute long-term plans and we do the right thing by the business, our customers and our people. That’s Computershare in a nutshell and our new structure is part of that. We continue to do the things that have served us well and evolve with our customers’ needs.
For Issuer Services, our ongoing focus is to re-energise, expand and increase the profitability of our largest and most established business. We are ambitious for growth – our aim is to continue to build our core business while leveraging our registry skills and deep customer relationships into new complementary markets (including Entity Management, Registered Agent, and Private Markets). We will continue to improve our front office capabilities and expand and enhance our product suite. With Net Promoter Scores in this business between 50 to 70 across all our regions, we are well-placed to build share in these new revenue pools.
We also see positive structural growth trends in this area, such as rising compliance and regulatory reporting requirements, and increasing numbers of subsidiaries within company structures. The emerging field of ‘RegTech’ – technologies and services that help companies come to grips with rising compliance, governance and reporting requirements – offers us many new opportunities for cross-selling and further revenue growth.
In Share Plans, our decision to acquire Equatex is already bearing fruit, providing a greater than expected contribution towards these FY2019 results. Business integration is on track. We have commenced moving clients to the EquatePlus platform, and we reaffirm the $30 million of synergy cost benefits across the combined business that we detailed last May.
Taking a wider view, Equatex increases our scale, upgrades our technology and capabilities, balances our industry exposure and improves our earnings. It also enables us to continue to upgrade customer experience and to provide data insights to help our client companies attract, retain and reward their key employees.
We’ve also continued to invest in our US Mortgage Services business: $31.8m for the LenderLive acquisition, $100.4m in mortgage service rights and capex of $55.6m. We expect further growth in this market to be less capital intensive. The balance of loans under management in the US is up 25.7% to $101.8bn, and we are carefully building additional scale with scope to grow to around $150bn. Towards the end of FY2019, we achieved our target of 20% pre-tax profit margins in this business. We are quietly proud of this. We are now working on delivering these margins on a sustained basis.
Supporting our major business lines, we’ve continued to transition to a global service model, eliminating inefficiency and duplicated effort, and finding the best locations to provide the highest levels of service at lower cost.
We are also changing the way that technology is leveraged within Computershare. We have created specialised roles at the highest level of global technology management – a global CIO to drive innovation and development, and a global CTO to oversee service delivery and infrastructure. Together, they will be offering our business lines a range of models for how they develop new products and how they deploy them. Each business line has been assigned its own CIO, working with business heads to determine the best strategies to bring new products to market and the right mix of technology investment.
EXECUTING OUR STRATEGIC PRIORITIES
We have a very positive scorecard in terms of delivering on what we committed to do during the past twelve months. This is not accidental. Every year our global management team develops a carefully focused set of objectives that align with our longer-term plans for achieving sustained growth. I share updates for these priorities regularly with all my fellow employees across our global organisation. Everyone here knows them. It’s that shared alignment that underpins our execution strength and drives our results.
Please bear in mind that FY2018’s results benefited from over $60 million of event-based revenue that came from three large pieces of work – these mask somewhat the strength of our FY2019 results. Notwithstanding that high base, our revenue increased by 4.8% to $2,411.4 million.
Management EBITDA increased to $685.9 million, a rise of 10.2% which was aided by the improved revenue mix coming from margin income.
The EBITDA margin for the year increased by 130bps to 28.4%. Over the last ten years, Computershare’s EBITDA margin has been in a consistent range of between 24.1% and 29.4%. It has been below 26% in only two of those 20 half-year periods. Our goal is to continue to deliver high quality results through economic cycles.
Our management effective tax rate for the year was 26.5% which was a little lower than expected in our original guidance assumptions. As we noted at the half, there was a favourable settlement of a legacy tax matter, around $3 million, which was a major part of the benefit.
Management EPS was up 12.8% and statutory EPS was higher again at 76.57 cents, up almost 40% on last year. (This includes the gain on sale from the disposal of the Karvy business.)
Our cost-out programs are clearly part of this performance, delivering over $30 million of gross savings this year. These savings help us manage our costs. Total operating costs increased by 2.7% compared to revenue growth of 4.8%. Excluding acquisitions and disposals, total operating costs decreased 0.2%.
Our largest business, US Register Maintenance, continues to perform, achieving 5.3% organic revenue growth on the back of some high‑profile client wins increasing the number of shareholders we service. These clients recognise our technical expertise, capability in complex transactions and global scope.
Across Register Maintenance and Corporate Actions, our EBITDA margin increased to 35.8% (+250bps) despite weaker Corporate Actions activity in the second half.
In Employee Share Plans, revenue grew 29.6% and EBITDA was up 31.6%. This includes the Equatex contribution. EBITDA margin (excluding margin income) increased to 19.5% (+200bps) supported by efficiency gains.
In Business Services, we achieved revenue growth of 5.7%, which includes growth of 11.5% in mortgage services and another strong performance in corporate trust. We have started to expand this strong business into new markets.
Margin income also made a strong contribution of $250.7m, up 39.7%, on average client balances of $18.5bn for the year.
Computershare continues to deliver high returns, achieving returns of 26.4% (on equity) and 14.8% (on invested capital). We’ve paid a final dividend of 23 cents (+9.5% pcp) and an overall dividend of 44 cents (+10% on FY2018), along with an AUD 200m on-market buy-back. At the same time, we have maintained a conservative balance sheet. This provides us with the flexibility to self-fund our organic growth strategies with value adding acquisitions as they arise.
OUTLOOK FOR FY2020
While we have good cause to be optimistic about how Computershare is positioned for long-term growth and profitability, FY2020 Management EPS is expected to decrease by around 5% on FY2019 in constant currency terms.
While I am disappointed by this expected result, particularly for our shareholders, it shouldn’t be taken as an indicator of weakness in our core businesses. Rather, it reflects two factors for FY2020: extra costs imposed by the delayed migration of UK loans onto our own platforms and the adoption of AASB16 accounting for leases. Without these two factors, we would expect Management EPS to increase by 5% in constant currency terms.
We’ve been clear and consistent on our guidance on the UKAR migrations. Our engagement with UK Mortgage Services clients continues to be positive as we jointly progress through to the new agreed migration dates, and we absolutely expect to complete this onboarding by May 2020. In the meantime, we’ve brought forward a program of cost reductions in this business to respond to short‑term weakness in the UK mortgage market due to uncertainties surrounding Brexit.
However, more widely, we have expectations for higher growth and profitability in 2021 and beyond. We’ve brought in fresh management talent to revitalise performance and empowered them to pursue growth through new products and services to clients and shareholders. Our new global business line structure allows greater focus on front-office coordination and cross-selling. Improved customer service levels and investments in product development give us an increasing competitive edge in large markets.
We continue to foster technology innovation and expect to gain wider benefits from the toolkit we brought in with the Equatex purchase. We are driving further digitisation and data mining to streamline operational processes and improve our delivery for customers.
In light of this, I’d like to express my appreciation to our shareholders for the interest, input and support they have provided to us over the past year and look forward to their ongoing participation in the future.
I’d also like to thank my fellow workers across our many global offices for the outstanding contribution they continue to make to Computershare’s success. We have a special culture of customer focus and a ‘can do’ ethic that I have observed countless times on my travels. I draw a great deal of inspiration from their enthusiasm and professionalism; those interactions are the thing I enjoy most about my role. Mark Davis deserves special recognition. He has been a great partner for me and I thank him for his counsel and support over the years we have worked together.
In short, I am excited by the opportunities ahead of us and I am confident in our ability to deliver.
Stuart Irving
CEO