Looking ahead to next month's RBA Meeting, experts are pointing towards a rate cut.
In general, rate cuts help ASX stock valuations. But this isn't universal. In fact, some companies such as Computershare Ltd (ASX:CPU) can be hurt by lower interest rates.
Computershare Limited (ASX:CPU)
Computershare is a global financial services company that provides share registry, employee equity plan administration, corporate trust, loan servicing, and governance services in over 20 countries.
It has seen its share price soar over the last year, up 49.5% in that span.
For context, the S&P/ASX 200 Industrials (ASX:XNJ) sector is up just over 3% in the same period.
Why could it be impacted by interest rates?
Lower interest rates can mean lower loan repayments for some, potentially leaving households with more disposable income.
This can benefit sectors like retail, real estate, construction, and financials.
However, lower interest rates could negatively impact Computershare shares, because a significant portion of its earnings comes from interest income earned on client-held funds (called margin income).
Computershare temporarily holds large amounts of cash on behalf of clients (e.g., unclaimed dividends, escrow funds).
It earns interest on this money, and when central bank rates are high, the return is substantial.
If rates fall, that margin income declines, which can reduce overall profits — especially during periods when other parts of the business are flat.
However, it is important to recognise even a 50 basis point cash rate decline would result in a cash rate target of 3.60%.
This would still be higher than the cash rate target between June 2012 to March 2023, so it's still historically high.
Therefore, the impact of a rate cut depends on how quickly and how far rates fall and offsetting growth in other services like corporate actions or share registry activity.
What are brokers predicting?
The combination of lowering interest rates and huge rise in share price over the last year could see some profit taking from holders of CPU shares.
At the time of writing Computershare shares are trading at $40.72 each.
Broker Bell Potter believes this is slightly overvalued, with a "hold" recommendation and $36.83 price target on CPU shares.
Earlier this month, Seneca Financial Solutions' Arthur Garipoli said CPU shares may have run too hot too quickly (courtesy of The Bull), noting:
CPU has been a beneficiary of higher interest rates, which we believe have peaked. The stock has re-rated too quickly and is trading on lofty multiples, in our view. It may be time to consider locking in a profit.
Elsewhere, online brokerage platform SelfWealth lists the stock as "near fair value" with an average price target of $38.28.
