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Treasure Chest: Investors Missing Link

Treasure Chest | Oct 17 2018

A broker upgrade highlights a growing belief investor sentiment is holding back Link Administration when upside potential should suggest otherwise.

-Super changes in Australia weigh on sentiment
-Other factors offer upside
-UBS upgrades to Buy

By Greg Peel

Link Administration ((LNK)) provides, among other asset administration services, super fund administration, which is why the company was not impressed with the government’s May budget.

Having closed at $8.30 on that fateful Tuesday, Link’s share price shortly hit $6.79 in the wake of the budget release. The issue was a policy announcement that all inactive superannuation accounts with balances of less than $6000 would be transferred to the Australian Tax Office and the accounts closed.

This meant Link lost its CareSuper mandate, which while only representing some 1% of revenue would have a material impact on the number of members administered by the company, management warned, while at that point not knowing quite how much of an impact.

The numbers became more clear when Link’s FY18 result was released in August and indeed that result exceeded most broker expectations. Link’s share price has regained some ground since the May nadir but despite other services provided by the company, a pall has continued to hang over investor sentiment due to the ability of governments to giveth and taketh away.

There was no doubt Link’s earnings prospects had to be re-based, and to that end two of the eight FNArena database brokers covering the stock elected to downgrade their ratings post-result, but four retained Buy or equivalent ratings.

One was Morgan Stanley.

Set in Stone?

Late last month Morgan Stanley pointed out what should be obvious to most Australians who have ever followed politics and policy, being the possibility the super reforms announced in the budget, which are not set to come into effect until July 2019, being delayed or watered down.

And let’s face it, who knows what sort of super changes might be on the cards if there is a change of government.

The broker suggested Link’s share price at the time fully reflected an assumption the reforms would go ahead as announced, thus providing a “free option” on the re-rating the stock would enjoy if the full impact does not ultimately transpire.

Morgan Stanley reiterated an Overweight rating, alongside an In-Line sector rating.

Taking a similar but slightly different tack to Morgan Stanley’s “free option” suggestion, UBS has this morning upgraded Link to Buy from Neutral.

UBS suggests the market is ascribing no value to several positive factors with regard the stock, including longer term funds administration growth, value upside for the company’s stake in the PEXA online conveyancing business, and options for capital management, which could provide for a valuation increase of some 20%. The administrator is also a rare beast in that it is actually enjoying a tailwind from banking Royal Commission fallout.

And in the shorter term, currency movements are supporting the earnings of recently acquired Link Asset Services.

UBS has lifted its target for Link to $8.90 from $8.00, compared to an average $8.54 among the eight brokers.

The average earnings growth expectation for FY19 is 51% and dividend growth 19.7% to provide for a 3.1% yield at today’s share price.

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