Australia | Jun 20 2019
Link Administration is keen to highlight expansion and growth opportunities, although brokers remain concerned about pockets of weakness and volatility.
-Investigation into the Woodford fund adds further uncertainty in the UK
-Brexit not cited by competitors as a source of UK weakness
-Majority of growth options have long-term horizons
By Eva Brocklehurst
The investor briefing from Link Administration Holdings ((LNK)) showcased expansion and growth prospects, rather than dwelling on the recent FY19 guidance downgrade. The company did not provide more disclosure, although Citi notes the last few days have witnessed another increase in the level of activity and considers the Australian funds administration business stretched.
Elevated costs remain of concern and, while some of these may be ultimately recoverable, the path forward remains unclear. Management has indicated costs from the changes to the Australian Protecting Your Super program may remain elevated for another 12 months and it would start seeking compensation from funds.
UBS assesses, while the pressure from Protecting Your Super is likely to be temporary, revenue weakness in UK corporate markets most likely includes a recurring element because of client losses, in addition to the softness in transaction activity related to Brexit uncertainty. The broker continues to envisage FY20 as a transition year but believes the medium-term growth prospects remain sound.
Management has sought to reassure investors regarding its recent earnings yet Ord Minnett, on its calculations, still struggles to understand the explanation for the recent downgrade to guidance. The company reiterated that 60% of the downgrade to operating earnings (EBITDA) came from the Link Asset Services division, and most of this from the corporate and private client services, which is in the process of being sold.
The company has also indicated the rest of the weakness in this division stems from Brexit, although the broker has not viewed any similar concerns expressed by either Equiniti or Computershare ((CPU)).
Citi suspects that the impact of Brexit uncertainty on retained services is more than the company previously envisaged, given lower transaction revenue. UBS assesses registry client losses have played a role alongside lower IPO and transaction activity. Price competition has also been a factor.
Ord Minnett was pleased to note that if the Woodford fund, of which the company is authorised corporate director, was closed, the impact will be more than offset by other mandate wins. Credit Suisse believes the investigation into the Woodford fund adds further uncertainty over the short and medium-term and Citi agrees, noting that while the company has said it has done nothing wrong, the widely publicised case presents risk of reputation damage.
Growth opportunities are primarily focused on expanding into adjacent markets or a broadening products. While the opportunities are strategically sensible and the company has the debt headroom to fund several bolt-on acquisitions, Credit Suisse believes execution risk is relatively high. Moreover, the time horizon for such expansion is 3-5 years and, therefore, it is unlikely to be material enough to counter the earnings headwinds in FY20 and FY21.
The exception being PEXA which is currently experiencing strong growth and margin expansion, driven by increased utilisation of the electronic property settlement service. The business is running ahead of prospectus forecasts because of a higher uptake in Western Australia, although total volumes in the market are down -20% from their peak.
Other growth opportunities include banking and credit management, in the regions of Italy, Netherlands and Cyprus. The initial focus will be Italy, to help replace peaking volumes in Ireland. Fund opportunities are also being canvassed in Luxembourg, where the company has established a footprint and recently won its first client.
Ord Minnett suggests Link Administration will require some form of acquisition to expand into banking and credit areas in Europe, either directly or through an adjacent business such as real estate services.
UK pensions are another area, where there is an opportunity to leverage the Australian pension offering. The company is also in the process of developing centres of excellence which include offshore hubs in India.
Link Administration has announced an extension to the AustralianSuper funds administration contract for a further four years, its largest client on the platform. Macquarie considers this a positive development, given the length of time it is taking to re-negotiate the REST contract.
Citi agrees the market should take comfort in the fact that the AustralianSuper contract has been renewed six months ahead of schedule. Still the broker doubts whether investor scepticism will dissipate, as the short-term headwinds remains significant.
FNArena's database shows six Buy ratings, one Hold (Citi) and one Sell (Deutsche Bank). The consensus target is $7.06, signalling 30.9% upside to the last share price.
See also, Uncertainty Prevails At Link Administration on June 3, 2019.
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