Positive Views Prevail For Link Administration

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

Another downgrade to expectations for FY20 has dented market confidence in Link Administration, yet most brokers are inclined to consider the glass half full.

-FY20 likely to be a transition year
-UK regulatory issues still unclear
-Capital management predicated on return of confidence
 

By Eva Brocklehurst

Link Administration ((LNK)) may have downgraded expectations for FY20 but brokers take comfort in the fact that PEXA is delivering and there is the prospect of a capital return further afield.

PEXA provided $27m in operating earnings in the first half and exceeded expectations. Management has reiterated its intentions to gear up the business, which could mean further capital returns eventuate.

Morgans suggests original FY20 guidance was always optimistic and, while the downgrades are testing investor patience, FY20 is likely to be a transition year and there should be an improved earnings trajectory into FY21.

FY20 operating earnings (EBITDA) are now forecast to be -10% below FY19. Morgans assesses this largely stems from cyclical elements, such as lower non-recurring revenue in corporate markets.

The downgrade appears to be predominantly from a miss in the market-sensitive businesses and slower reductions in costs, Ord Minnett agrees, suspecting a rebound is likely from the lows of FY20. Given the share price has suffered from numerous downgrades over several years the broker suspects there will be no upside until investors are confident that several issues are in hand.

These include regulatory risks, as there remain questions over what the Woodford review by the UK Financial Conduct Authority will reveal. The company's fund solutions business is also facing elevated costs because of the Woodford investigation.

Ord Minnett admits to having mixed views on the stock. The share price is not demanding but there are some near-term negative catalysts. On balance, the broker opts for a positive view, given earnings forecasts are now more realistic, and maintains an Accumulate rating.

Morgan Stanley, on the other hand, downgrades to Equal-weight, finding the combination of another downgrade, a soft pipeline of new business and some concentration risk a signal that growth will be harder to come by.

While most of the issues confronting the company should stabilise of the next 12-24 months, the broker remains cautious. The issues regarding retirement and superannuation solutions (RSS) are well known but there is some client concentration risk, given the exposure to industry super funds.

Credit Suisse found the results disappointing but likes the benefits of a portfolio of businesses where growth in some can offset the challenges in others, and upgrades to Outperform.

M&A/Capital Management

The broker envisages further scope for M&A and capital management in future, although this is partly predicated on a re-rating which may take some time to eventuate, given the need for the market to re-build confidence.

While the transformation program is running behind schedule, management is confident it will deliver $50m in targeted savings by FY22. Morgans also notes new geographies such as Italy and the Netherlands are making a more meaningful contribution to revenue.

However, UBS assesses, while the RSS business is firm, the downturn in transaction revenue across corporate markets and banking & credit management (BCM) has been sharper than expected, which partially reflects inertia in the lead up to Brexit.

Nevertheless, this could persist, with volatility a feature as coronavirus takes centre stage. BCM loan growth prospects and the key market of Ireland appear to be moderating and this could weigh on the Pepper European Servicing growth outlook, the broker adds.

FNArena's database has five Buy ratings and one Hold (Morgan Stanley). The consensus target is $6.13, suggesting 32.2% upside to the last share price. Targets range from $5.30 (Morgan Stanley) to $7.10 (Macquarie).

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