Share registry company Computershare slashed its earnings guidance on Monday, blaming its more pessimistic outlook on the financial market repercussions of the coronavirus outbreak.
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."
Shock US interest rate cuts were will have a significant impact on Computershare earnings. Credit:Bloomberg
"Up until last week, our confidence levels were high on meeting guidance," he said.
Interest rate expectations for the remainder of the 2019-20 financial year have also fallen below what the company anticipated.
The investor services company's earnings are sensitive to interest rate movements due to the fact that it derives margin income on cash held on behalf of its share registry clients before dividends and other distributions are made to the clients' shareholders. Computershare provides stock registration and transfer services to listed companies.
According to Bloomberg Intelligence, US dollar denominated balances made up half the funds it held on behalf of clients which were not hedged against changes in interest rates.
Pound sterling comprised another 26 per cent of the balance, Canadian dollars 14 per cent and the Australian dollar just 4 per cent.
"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.
Last month, Computershare had been guiding the market for a 5 per cent decline in underlying EPS (earnings per share) for the financial year, its preferred earnings measure.
It now expects this will decline 15 per cent.
Computershare said its earlier guidance assumed margin income revenue for 2019-20 financial year would be down around 8 to 10 per cent versus 2018-19. That figure is now expected to decline 25 per cent to $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 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."
The rapidly changing interest rate outlook has seen the company's share price plunge 34 per cent in less than a month to a low of $11.27 on Wednesday. At 2.45pm AEDT, shares in the company were down 41¢, or 3.47 per cent, to $11.41. The broader market was also deep in the red, with the ASX 200 down 2.64 per cent.
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