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Link – positioned for long-term growth

Paul Rickard
Friday, August 24, 2018

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The “hiccup” that beset growth stock Link (LNK) appears to be over. Following the release of its profit report on Friday, Link rose 48c to close at $8.07, well above the post “Budget blues” low of $6.73.

Link Administration Holdings (LNK) – August 17 to August 18

Source: nabtrade

The low came after a surprise announcement in the Federal Budget to cap administrative fees on low balance super accounts at 3% and sponsor the consolidation of inactive super accounts. Link, which is Australia’s largest provider of back office services to super funds, including Australian Super and REST, earns revenue largely based on the number of super accounts it services. To come into effect from 1 July 2019, Link has estimated that it will take a hit to revenue of $55 million.

On a total revenue base of just on $1.2 billion and EBITDA of $335 million, a $55 million hit is still material. But the market seems to have put this “hiccup” behind because it buys Link’s long-term growth story, backs management, and perversely, the Government’s changes and other regulatory pressures could act as tailwinds for Link’s super fund administration business unit.

As the industry’s least cost provider, Link says its administrative platform will assist super funds deal with the pressures to provide improved services and reporting to their members, and lower overall fees.

The Link business

Link has three Australasian domiciled businesses and the UK/Ireland based Link Asset Services (formerly Capita Asset Services), which was acquired in November 2017.

The Fund Administration business contributed almost one-third of group EBITDA with $123.1 million in FY18, up 4.2% on FY17. By the number of super members, it has a 35% share of the market for back office super administration services. Its nearest competitor is Mercer with 7%, while super funds providing their own “in-house” services (a key target growth area for Link) account for 52% share. Clients include Australian Super, REST, HESTA and Cbus.

Average super account admin fee

Source: Link

Corporate Markets, the traditional share registry business, grew revenue by 8.2% and EBITDA by 8.3% to $51 million. Net client growth of 226 clients and increased capital markets activity (largely outside ANZ) drove the revenue growth. Recurring revenue, which accounts for 81% of the division’s total, grew by 1.6%.

Technology & Innovation, the third division, grew revenue by 6.8% and EBITDA by 32.5% to $72.9 million. The improvement in EBITDA arose mainly from IT cost and integration efficiencies. Services are provided to Link’s other divisions and external clients, with the latter now responsible for 33% of revenue.

Finally, the European based Link Asset Services (acquired in November 17). On a full year basis, this will be Link’s biggest division generating around 37% of group EBITDA. For the eight months of FY18 it earned $93.8 million. Link Asset Services operates in 10 European markets, providing back office services to fund managers, asset managers, corporate borrowers and investors.

Link has demonstrated consistent “through the cycle” growth in earnings over the last decade, from $89 million in 2009 to $335 million in 2018. It boasts a highly experienced management team, has a sound record of business acquisitions and integration, has invested in proprietary technology and is positioned to benefit from opportunities in existing and adjacent markets. Just on 80% of revenue is “recurring”.

Link Group – EBITA 2009 to 2018

Source: Link

The Group’s growth strategy revolves around: investing in predictable markets with tailwinds such as superannuation; leveraging scale and proprietary technology to drive efficiency and lower cost; product and service innovations for customers; regional expansion; and investing in adjacent market opportunities (for example, its shareholding in PEXA, the company processing and settling property transactions).

What do the brokers say?

The brokers like the stock, noting the prospect of moderate earnings growth, margin expansion, strong cash flow generation and an undemanding pricing multiple.

According the FN Arena, Link is trading on multiple of 18 times FY19 forecast earnings and 17 times FY20 earnings.

Dividends are forecast to rise from a total of 20.5c in FY18 (100% franked) to 24c in FY19 (yield 3.0%).

Four out of the eight major brokers have buy recommendations, with the others sitting at neutral. The consensus target price is now $8.56, up 37c on the pre-result target of $8.19. Individual recommendations and targets are set out below.

Source: FNArena

Risks include driving integration benefits from the acquisition of Link Asset Services and revenue growth in the domestic business.

Bottom line

Back in April, and before the Government’s announcement, Link raised $300 million in an oversubscribed institutional placement at $8.50 per share. This was achieved at just a 2.4% discount to the then share price of $8.71.

The stated purpose was to provide Link with “flexibility to pursue strategic opportunities”. One of these opportunities might be PEXA, which is currently undertaking a dual track trade sale/IPO process. At the analysts’ briefing, MD John McMurtrie said that Link, which owns just under 20% of PEXA, was examining all options, including being a buyer or seller into the process.

Putting the PEXA process to one side, the success of the institutional raising demonstrated the very high esteem that the market has for Link. Friday’s profit result will add to this, and notwithstanding the “hiccup” from the Government, I think Link will re-test the previous high of $9.05 in due course. For the portfolio – this is a long-term growth stock.

Published: Friday, August 24, 2018

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