Is Link On The Acquisition Trail?

This story features LINK ADMINISTRATION HOLDINGS LIMITED. For more info SHARE ANALYSIS: LNK

Link Administration has made a surprise equity raising and brokers suspect a small acquisition may be in the offing.

-Timing of capital raising considered opportunistic, given share price bounce
-Near-term downside risks as market absorbs additional equity
-Soft top-line growth makes it hard for some brokers to justify higher multiples
 

By Eva Brocklehurst

Link Administration ((LNK)) has announced a $300m fully underwritten institutional placement and non-underwritten share purchase plan. Funds will be used to pursue strategic opportunities, although Morgans suggests some trust in management is required as there is no actual acquisition being announced.

The main concern is that management is over stretching as the integrations of Superpartners and Link Asset Services are continuing, although Superpartners is at an advanced stage. Still, the broker suspects management must be progressing some strategic opportunities, likely to be smaller bolt–on businesses.

Further acquisitions could enhance a strong growth profile and Morgans maintains an Add rating. The placement will be conducted at $8.50 a share and reduce the pro forma net debt/EBITDA multiple to 1.6x from 2.5x. Citi points out the company was always a little uncomfortable with the high level of gearing post the Link Asset Services acquisition.

Link has successfully grown via multiple acquisitions in the past and brokers suspect the timing of this capital raising is opportunistic, as the share price has bounced recently and market volatility is increasing.

At the results briefing in February, Credit Suisse notes the company was optimistic about the opportunities for small acquisitions in Link Asset Services, and this may be an initial focus. Regardless, the additional capital will give the company to the ability to respond quickly to opportunities as they arise.

UBS estimates acquisition capacity of $550m after the raising, expecting dilution from the capital raising could be fully offset over time should the company deploy the funds into acquisitions.

Macquarie calculates the raising to be -4% dilutive to earnings, net of reduced interest expenses and removal of the dividend reinvestment plan. This assumes around 15% of retail shareholders participate.

Risks

Longer-term value is envisaged but the broker is cognisant of the downside risks in the near term, as the market absorbs the additional equity. Macquarie does not expect an acquisition of the same scale as Superpartners or LAS, given the busy integration schedule currently underway.

A material acquisition before the current integration has progressed would produce execution risks and cause a de-rating in the share price, the broker contends. While acknowledging the company is delivering earnings growth through cost reductions and M&A, Credit Suisse observes top-line growth appears relatively low and this makes it difficult to justify a higher multiple.

In contrast, Citi gives the company the benefit of the doubt and retains a Buy rating, although lowers its target to reflect the dilution. While there is a risk that sentiment may be hurt by the surprise equity raising, the prospect of another acquisition should extend the growth story.

Moreover, the company has reiterated synergy targets for a further $35m in savings from the Superpartners integration amid Link Asset Services synergies of at least GBP15m per annum. Citi's analysis continues to indicate these are likely to be conservative estimates.

FNArena's database shows three Buy ratings and two Hold. The consensus target is $9.27, suggesting 14.7% upside to the last share price. This compares with $9.44 ahead of the raising announcement.

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