Don't be fooled into thinking the Computershare Limited (ASX: CPU) share price is cheap after its recent steep fall, warns Morgan Stanley.
But the market isn't paying much heed today with the CPU share price rising 0.4% to $17.24 during lunch time trade as the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index improved by 0.5%.
In contrast, its peers have delivered a mix bag with the Link Administration Holdings Ltd (ASX: LNK) share price falling 0.5% to $7.36 while the ASX Ltd (ASX: ASX) share price and Iress Ltd (ASX: IRE) share price gaining 0.3% to $70.71 and 1.5% to $13.23, respectively.
Cum-consensus downgrade
However, it's the Computershare share price that seems most at risk of underperforming in the near-term if Morgan Stanley is on the money. The broker has listed three reason why it thinks investors should dump the stock now.
The first is based on concern that the consensus earnings forecast for Computershare is too high, which is in part driven by falling US merger & acquisition activity, a peak in one-year certificate of deposit (CD) rates and ongoing escheatment of abandoned client funds.
A decline in corporate activity will also weigh on the earnings for the group, according to Morgan Stanley.
Falling fees from M&A & core registry business
"With the number of M&A completions down across all major regions in the first three months of 2019, we think CPU's corporate actions revenue will be flat to modestly down in 2H19e," said the broker.
"We also flag the >US$140m pa of share plans transaction revenues post-Equatex which are at risk should a bear market play out."
The third reason why investors should be wary of Computershare comes from the attrition of its core registry.
"Latest US transfer agent filings published this week show a slowdown in shareholder attrition rates in 2017/18 to just -1% y/y [year-on-year]," added Morgan Stanley.
"A spate of large demergers have provided reprieve (inc Metlife/Brighthouse, Dow/DuPont/Corteva, 21CF/Fox). We expect a return to ~5% p.a. attrition driven by ongoing shift to Street Name and issuer consolidation."
Risker than most think?
The broker concludes that the market has gotten Computershare wrong. Investor regard it as a less volatile (relative to the market) stock with high earnings certainty when the company is highly cyclical and heavily dependent on transaction fees.
Based on these points, Morgan Stanley doesn't believe the price-earnings multiple Computershare is trading on is justified and it has reiterated its "underweight" recommendation on the stock.
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