Has Link Become A Compelling Buy?

This story features LINK ADMINISTRATION HOLDINGS LIMITED, and other companies. For more info SHARE ANALYSIS: LNK

Many brokers consider Link Administration has become a compelling Buy after recently de-rating on the back of reform proposals and the loss of a major account.

-Market appears to be unfairly discounting Link
-Super account losses considered priced in
-European opportunity may have substantial upside
 

By Eva Brocklehurst

Link Administration Holdings ((LNK)) has sustained negative catalysts over recent months which have weighed on the share price. Yet most brokers believe, while uncertainty continues to some extent, the risks are factored into the stock and value is more compelling.

In April the company raised $300m in equity, which diluted shareholder returns, and did not specify a use of the funds other than suggesting flexibility to pursue opportunities.

Subsequently, in May, reforms were announced by the federal government regarding inactive low-balance superannuation accounts, aimed at consolidating accounts with the Australian Taxation Office acting as administrator.

Link is the largest funds administration business, with 9.3m customer accounts, of which Deutsche Bank calculates 2.6m are inactive. At the same time Link also lost its contract with CareSuper to Mercer.

Link, guiding to a maximum revenue loss of -$55m from the budget proposals, has pointed out that the proposed regulatory changes make smaller funds less competitive and increasing complexity makes its offering more compelling.Link will be arguing in its submission to regulators that the 13-month period of inactivity for low-balance super accounts is too short. Citi envisages some chance proposals will be watered down but, given the impact on the government's fiscal position, there is little likelihood of material change.

Morgan Stanley observes the business is complex and the market lacks understanding, which weighs negatively on the valuation. The broker initiates coverage on the stock with an Overweight rating and finds several reasons to switch to Link from Computershare ((CPU)).

In contrast to Link, Computershare is trading at a 10% premium to its historical average one-year forward PE, versus Link at a -40% discount. The broker questions why the market has re-rated Computershare for accretive acquisitions yet discounted the opportunity that exists with Link.

Risks

Morgan Stanley acknowledges the risks that exist if funds administration fails to navigate the squeeze on superannuation, or if new government measures cause industry account numbers to shrink faster than expected.

However, the broker forecasts margins in Link Asset Services to increase to 27% from 22% and overall margins to stay broadly flat at 28% through to FY21. This could be downgraded if fund administration requires additional investment in technology or there are execution problems that delay integration.

Also, ASX ((ASX)) is implementing its distributed ledger platform in 2020 and the technology promises to provide better analytics and almost a real-time view of the register. This could disrupt Link's analytics business.

Macquarie agrees the impact of recent disappointing announcements has been factored into the share price and there are several positive catalysts on the horizon. There are various avenues for organic growth, in the broker's view, and balance sheet capacity suggests acquisitions can also underpin growth.

With the enumeration of the super reform loss, an overhang has been removed from the stock, Ord Minnett acknowledges, but highlights near-term uncertainty regarding the impact of the 3% fee limit and the loss of CareSuper.

Citi, on the other hand, believes the stock offers enough upside to compensate investors for the remaining uncertainties and, in May, upgraded Link to Buy.

Europe

The market is missing the opportunity that exists for Link to build a European franchise, Morgan Stanley believes. The Link Asset Services business is set to contribute 40% of operating earnings (EBITDA) by FY20 but remains the least well understood aspect of the business, the broker notes.

Investors appear sceptical about offshore expansion and are unconvinced that Europe will deliver an earnings upgrade. In contrast, Morgan Stanley forecasts 10% annual growth in operating earnings in FY19-21.

The broker accepts the investor caution, given many Australian companies have undertaken offshore expansion and ended up destroying shareholder value.

Obtaining clarity on the outlook is tough but the broker suggests the acquisition of Capita Asset Services last November is an opportunity to consolidate a pan-European asset management franchise.

Key to creating shareholder value will be the integration of the four underlying businesses to take out costs, turning around underperforming assets and deploying capital to consolidate the footprint.

FNArena's database shows five Buy ratings and three Hold. The consensus target is $8.13, suggesting 11.1% upside to the last share price. Targets range from $7.50 (Ord Minnett) to $9.00 (Morgan Stanley).

See also, Is Link On The Acquisition Trail? on April 23, 2018.

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