Shares in Computershare (ASX:CPU) have progressively weakened since August last year. We attribute this to factors such as a reduced contribution from Margin Income, muted corporate activity.
We recently researched the Company in The Dynamic Investor after it reported results for the six months to 31 December 2025 (1H26). The 1H26 result was slightly ahead of consensus estimates and guidance was upgraded. However, a key question is whether these factors are enough to warrant a favourable view on the shares at current levels.
About Computershare
Following the recent divestments of Mortgage Services businesses in the US and UK, Computershare operates three segments:
i. Issuer Services: Register maintenance and corporate actions.
ii. Employee Share Plans: Administration of employee equity.
iii. Corporate Trust: Debt administration services in the US and Canada.
The Company also manages customer cash balances, on which it generates an interest margin that is exposed to global interest rate movements. The divestment of the Mortgage Services businesses has facilitated acquisitions of BNY Trust Company of Canada in March 2025 and Morgan Stanley’s UK/European employee share plan business.
Key Fundamental Drivers
Earnings Benefit from Margin Income Growth Reducing
CPU earns Margin Income on large client cash balances it holds on behalf of clients (i.e., for dividends, buy-backs, takeovers). When market interest rates/yields rise, the interest it can earn (before sharing part of it with clients) tends to increase.
The Company have increased guidance for Margin Income in FY26, to US$730m (up ~US$10m from previous guidance of US$720m), mainly due to stronger balances of US$30.8b (+US0.6b compared to August 2025). It is worth noting that there is a degree of variability in the Margin Income guidance for FY26, given that around 1/3rd of FY26 balances is exposed to interest rates. The remaining 2/3rd is insulated from interest rate movements.
The minor upgrade to Margin Income guidance for FY26 (to US$730m) is still lower than the balances in each of the last three years. Further, it is not at a level that would offset cost growth pressure, as has been the case in the recent past.
Cost Growth Impacting Operating Leverage
Operating expenditure growth in 1H26 increased to +7.7%. This level of growth is above that reported in recent periods. Disappointingly, the cost savings (or ‘cost-out’) outlook for FY26 has been revised lower. However, higher cost-out benefits are expected in FY27.
Further, CPU has re-affirmed that with current restructuring programs to complete by end of FY27, cash-related restructuring costs will no longer be taken below the line. This starts to address investor concern regarding the significant and persistent deviation between statutory and underlying earnings driven by: i) Restructuring ‘business-as-usual’ costs, and ii) Merger & Acquisition (M&A) and amortisation costs taken below the line.
Strong Balance Sheet Position
Historically, CPU has operated within a target gearing range of 1.75x to 2.25x (on a net debt to EBITDA basis) in order to maintain its investment-grade credit profile. However, following recent divestments and strong/consistent cash generation (supported by a capital-light model), gearing has significantly reduced. As at 31 December 2025, gearing was 0.3x, down further from 0.42x as at 30 June 2025.
The Company expects gearing to decline further to ~0.20x at the end of FY26 in the absence of M&A opportunities, and expect a net cash position at the end of FY27. This offers the potential for sustainably higher dividend payments. To this end, management commented that the dividend payout ratio would be in the mid-50s (%) in 2H26 – in line with interim dividend announced at the 1H26 result.
While growth via M&A is an option (especially in light of substantial balance sheet capacity (~US$2.5b)), management noted no upcoming transactions.
Fundamental View
CPU shares are currently trading on a 1-year forward P/E multiple of ~15x, which is broadly in line with the average over the last three years of ~15x. In the context of an EPS growth profile of +4.5% over FY25-28 on a CAGR basis, the current risk-reward is balanced. Aside from unappealing valuation metrics, we highlight several factors warranting a cautions view:
- Cost growth is limiting scope for group operating leverage and presents a downside risk to medium term EPS growth forecasts.
- Regarding potential upside risk to medium term EPS growth forecasts, this may come from a pick-up in equity and debt market volumes given that lead indicators are turning positive. However, at present, there is no tangible evidence of volumes improving and any upside from improved activity is likely to be evident in FY27, as opposed to FY26.
- While further debt-funded acquisitions would likely be EPS-accretive, management noted no upcoming transactions. It also remains unclear how long the Company would be prepared to sit on a net cash balance sheet position.
Charting View
CPU spent most of 2023 – 2024 trading sideways in a range before breaking out later in 2024. It rallied from about $28 to over $40 in a short period of time. However, it struggled across the first half of 2025 and it is now trending lower again. The risk for now is to the downside, and the most likely target is the support line near $28.
Michael Gable is managing director of Fairmont Equities.
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