The Computershare Limited (ASX: CPU) share price is currently lower than it has been since April of 2017. Computershare shares fell 11% last week and a further 10% so far this week at the time of writing.
While the general market malaise is likely the reason for most of this, the company recently reported a downturn in performance. Based on earnings multiples or earnings yield, Computershare is a cheap ASX blue-chip share within the large-cap IT sector.
In its 1H20 results, Computershare reported a 51.9% reduction in net profits for the previous corresponding period.
This reduces to 17.4% when adjusted for its sale of financial services company Karvy in the previous year. Revenue impacts came largely from three areas. First, reduced event-based revenues. Second, reduced margin revenues due to reduced balances. And third, impacts from higher tax rates and currency changes.
UK mortgage services
Computershare suffered a US$18 million impact from the delay in migrating its UK Mortgage Services platform. This powerful IT platform will give Computershare the ability to service a mortgage across its lifecycle.
A similar life-of-mortgage service in the US has outperformed expectations. It is spearheading new revenue creation for the company. The US Mortgage Service's unpaid principle balance (UPB) is up 9.6%, driving up margin revenues. The company is targeting a return on invested capital of 12% – 14% from these services in the US alone after tax.
A cheap blue-chip with a strong base
With a return on capital employed (ROCE) of 12% and over in the past two years, Computershare is an economic manager of capital. Its current price to earnings (P/E) ratio of 14.7 is lower than the 10-year average. In a vote of confidence, 4 out of 8 directors increased their holdings in the past week.
I believe Computershare's revenues will continue to improve due to a number of factors.
The performance of the US Mortgage Services platform has outperformed expectations. In addition, the company continues to generate annuity-style revenues to replace event-based revenues. Further, scale will increase profits.
In May 2020, the UK Mortgage Services platform migration will be completed which will bring additional recurring revenues. Also, revenue from employee share plans was up by 23.5% in H1.
Foolish takeaway
The market is punishing Computershare for a late IT project. This project, based on the US experience, will add to the company's already impressive revenue streams.
Computershare is an ASX blue-chip share at a historically low price that has momentum in earnings growth through 2H20.
