Challenges Continue For Link Administration

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

Link Administration is expected to find FY19 challenging, although the new Link Asset Services business should provide synergies and growth.

-Percentage of recurring revenue declining
-Europe expected to deliver an earnings upgrade
-Lack of clarity on use of proceeds from capital raising
 

By Eva Brocklehurst

Link Administration Holdings ((LNK)) is bedding down recent acquisitions and, while growth in the domestic business is likely to be soft over the next year, most brokers expect synergies from the new Link Asset Services to underpin momentum.

Macquarie is more confident in the growth trajectory for revenue from this newly-acquired division and increases revenue growth forecasts to a compound 5% over the next three years. While the percentage of recurring revenue declined in FY18, the broker believes the opportunity for further fee-for-service work is still attractive.

Ord Minnett considers the result boosted by cyclical tailwinds, masking structural challenges in funds administration. The effect of contract losses is emerging and the broker expects the greatest impact will be felt in FY19. After a strong appreciation in the share price, and amid lower starting margins in Link Asset Services, Ord Minnett downgrades to Lighten from Hold.

The market should unwind the price/earnings discount on the stock, in Morgan Stanley's view, as growth is evident across all four of the company's businesses. Fund management grew 12%, loan servicing grew 10%, trust services grew 4% and market services grew 2%. The broker believes its bullish thesis is playing out.

Citi, on the other hand, expects a modestly challenging year ahead, as accounts are being lost in funds administration and there is significant price competition in corporate markets in Australasia. The main growth areas are Superpartners and Link Asset Services, which are still calculated to provide around 10% growth in earnings per share.

FY18 results were assisted by a lower tax rate in the second half while margins also expanded in both funds administration and the technology division, amid the synergies from Superpartners. Morgans points to margins in both divisions being within 1% of returning to FY14 levels. Technology margins expanded by 5% in the second half and funds administration by 2%.

Nevertheless, the broker acknowledges revenue growth was assisted by significant non-recurring revenue and second half recurring revenue, ex Link Asset Services, was actually down -2%. Ord Minnett also points to an increasing component of revenue coming from non-recurring sources.

Credit Suisse downgrades to Neutral from Outperform. The trends in the broader business are soft and the broker agrees that while higher levels of fee-for-service revenue provided an offset in FY18 this is not likely to be repeated to the same extent in FY19.  The broker reduces forecasts by -3% for earnings per share in FY19 and FY20, largely from -4-5% downgrades to operating earnings (EBITDA) estimates.

Credit Suisse acknowledges the company should be able to grow its earnings despite the regulatory headwinds and account losses but nevertheless envisages the growth profile being significantly lower than it once was, and the headwinds are likely to consume most of the synergy benefits from acquisitions.

Uncertainties

While retaining a -$45m negative impact from the Commonwealth budget proposals in its estimates, Citi is increasingly convinced the company's assessment of the impact will prove conservative, given the mitigating factors.

Moreover, regulatory uncertainty from both the Financial Services Royal Commission and the Commonwealth budget may actually boost client demand for project work, Morgan Stanley asserts.

The broker accepts that the market is complacent around the risks of further regulatory measures to remove duplication, expecting superannuation account numbers will shrink by 30% by 2023, but considers the headwinds are factored into the stock price and the long-term growth story remains intact.

Link Asset Services

Link Asset Services reported maiden operating earnings of $94m for the eight months to June 2018. The strong revenue trends in this business provide Morgan Stanley with greater conviction that Europe will deliver an earnings upgrade cycle, although a British exit from the EU does reduce growth opportunities in the UK franchise.

So far, Morgan Stanley believes investors are unclear about the long-term vision and lack confidence in Europe. The final two months of the first half are seasonally strong and this, too, makes it difficult to make comparisons half on half. Credit Suisse observes that Australian dollar results in isolation are difficult to analyse as they only represent earnings for part of the period.

Following the acquisition of this business, the company has reinvested GBP7m over the last year reflecting higher operating costs and an increase in bonuses following a rundown of bonuses under the previous owner. Going forward, as the company starts to realise the synergies, this reinvestment should be offset but Credit Suisse calculates it will lower growth synergies by around -50%.

Morgans finds a lack of clarity on the full use of the proceeds from the recent capital raising. Management has revealed 20% of the proceeds were applied to two small acquisitions – TSR Darashaw in India and Leveris, a UK banking data platform.

FNArena's database shows four Buy ratings, three Hold and one Sell (Ord Minnett). The consensus target is $8.43, signalling 7.6% upside to the last share price. Targets range from $7.00 (Ord Minnett) to $9.55 (Morgans).

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