Australia | Feb 04 2019
Rather than take part in the corporate trust market consolidation, Link Administration has opted to sell this division, freeing up capital to pay down debt and focus on other segments.
-Lack of scale supports decision to sell the corporate & private clients business
-Issue centres on whether there are any stranded costs to be accounted for
-Confidence in Link Administraton increased post re-pricing of AustralianSuper
By Eva Brocklehurst
Link Administration ((LNK)) has surprised the market by announcing the sale of its corporate & private clients business, a subset of Link Asset Services, the UK business which was acquired in 2017. While unexpected, corporate & private clients represented only circa 10% of group operating earnings (EBITDA) and UBS does not believe the transaction will have a material bearing on the outlook.
Rather, given there was little in common with the company's core business, management can now focus efforts on other divisions. As Brexit exposure has also been tempered, and balance sheet options restored earlier than expected, the broker reiterates a Buy rating.
While there was some alignment with existing verticals Macquarie understands the decision to sell the division because of a lack of scale. In order to achieve scale, Link Administration would need to be an active participant in market consolidation. Instead, a decision has been made to allocate capital elsewhere. The near-term dilutive impact is slightly disappointing but the rationale makes sense to Macquarie as it highlights capital discipline.
Credit Suisse supports the divestment on the same basis, and considers the price received sensible, leaving the company with capital options for the future. The broker points out, while the other three divisions have dominant market positions in each of their respective industries, the corporate & private clients business only had 5% market share of the industry revenue pool.
The transaction is not expected to be completed until September and Link Administration is expected to book a post-tax gain on completion based on current FX rates. UBS adjusts its estimates modestly, reducing FY20 forecasts for earnings per share by -2.8% and FY21 by -2.0%, after allowing for capital to be redeployed into buybacks.
Pro forma gearing is also set to fall to the bottom half of the company's target range of 1.5-2.5x. While the broker conservatively factors in buybacks, in reality the company is expected to pursue more accretive M&A, having reiterated its strategic ambitions.
Morgan Stanley suspects this is more than likely to occur in Europe. The broker had expected Link Administration would be a buyer of assets, given the significant consolidation opportunities within the fragmented corporate trust market. Moreover, the corporate & private clients business had potential synergies with fund solutions and was the second highest growth engine within the European division, in the broker's opinion.
The sale price of GBP$240m is also below Morgan Stanley's estimate of value, albeit a premium to the valuation implied by the current stock price. The broker's issue centres on whether there are any separation/stranded costs, given that work was already underway to centralise back-office functions. The company is due to report its results on February 15.
Deutsche Bank considers the sale a positive move, as there was no competitive advantage for Link Administration in the corporate & private clients business. The main concern the broker retains, is that the pace of expansion has been very rapid since listing, which leaves management stretched and business complexity heightened.
Balancing this out, Deutsche Bank accepts the stock is relatively cheap and management is doing a good job at taking out costs. Moreover the re-pricing of the industry fund, AustralianSuper, should take some pressure off any fee renegotiations following account consolidation.
While there is uncertainty regarding the impact of the regulation of super account memberships, Credit Suisse is also confident following the re-pricing of AustralianSuper that Link Administration can, at least partially, offset the headwind.
Credit Suisse believes the company received a fair price for the corporate & private clients business, in line with the price paid in 2017 for Capita Asset Services. Link Administration was required to buy the segment as part of the acquisition of Capita Asset Services, as that company was unwilling to break up its assets.
The broker believes Link Administration can deliver around 10% growth in earnings per share over the next 3-4 years although the growth may not be linear. Growth is expected to be driven by M&A, synergies, greenfield expansion, price increases, and higher growth among industry funds membership versus retail funds.
FNArena's database has six Buy ratings, one Hold (Deutsche Bank) and one Sell (Ord Minnett, yet to update on the divestment). The consensus target is $8.27, suggesting 14.9% upside to the last share price. Targets range from $7.20 (Ord Minnett, Deutsche Bank) to $9.05 (Citi, yet to update on the divestment).
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