Link Delivers On Targets Yet Upside Elusive

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

Funds administrator Link Administration has delivered on its integration targets yet several brokers suspect upside is factored into the stock.

-Expects to return group operating earnings margins to 34% by FY20
-Near-term headwinds for recurring revenue suggests better buying opportunity ahead
-Risks from competitive pressures which may erode margin expansion
 

By Eva Brocklehurst

Market services and funds administrator Link Administration Holdings ((LNK)) has delivered on its Superpartners integration targets in the first half of FY17, ahead of time and budget. Brokers expect these synergies will continue to materialise through FY18 and FY19.

The company posted results ahead of market expectations and materially stronger than the previous corresponding half, and expects to progressively return group operating earnings (EBITDA) margins to 34% by FY20. Yet, several broker consider this upside is already factored into the stock.

In Macquarie's view the main issues for Link remain revenue growth, margin progression and the movement in provision balances. Link utilised $24.5m in provisions in the first half and reversed $2.9m in other provisions via significant items. For the company to achieve Macquarie's earnings expectations, these costs will need to be removed.

Macquarie forecasts 1-3% revenue growth from FY17-20 and likes the fact that new business continues to bolster recurring revenue in an competitive environment. While pricing remains under pressure this is offset by increased volume, the broker notes. Macquarie retains an Outperform rating.

A tougher corporate market is eroding the medium-term margin upside, UBS believes. Hence, the broker envisages only moderate upside to the stock, calculating longer-term growth in earnings per share of 3-4% per annum and lifting this to 6% per annum when potential capital management accretion is included.

Better Buying Opportunity Ahead

The broker's Neutral rating is retained. Funds administration margin expansion particularly impressed UBS, as it lifted to 22.0% compared with estimates of 18.0%.

Citi finds the share price becoming more attractive yet, with some near-term headwinds for recurring revenues in funds administration, suspects there may be a better opportunity ahead. Citi also retains a Neutral call. Substantial earnings growth is intact, driven by the recovery in margins as Superpartners synergies are realised.

In the near term, nevertheless, there are revenue growth pressures for funds administration, as the fee reduction for Superpartners appears reasonably significant. The company's corporate markets division won a number of clients during the half but margins fell to 23% from 28%, likely in Citi's view to be partly caused by the drop in non-recurring revenue that was flagged for this division after a robust performance in the previous corresponding half.

Funds administration produced greater revenue growth than Morgans expected, while the corporate market revealed margin compression, which remains a concern. The broker likes the stock and believes it has a strong competitive position and should benefit from favourable longer-term structural tailwinds. Morgans forecasts double-digit growth in earnings per share per annum over the next four years.

The risk lies with competitive pressures, which may erode the margin expansion from the Superpartners synergies. The broker believes the current valuation is fair as opposed to offering significant value and maintains a Hold rating. Upside risks are likely to come from further client wins in funds administration, stronger EBITDA margins in corporate markets, and faster and larger synergies extracted from the Superpartners integration. Downside risk come from greater competition.

Acquisition-led Growth?

Citi notes, at the IPO, one of the company's attractions that was highlighted, beyond the margin expansion from Superpartners synergies, was the opportunity to grow market share in funds administration, given its significantly cheaper cost of administration.

The unease expressed by the competition regulator, ACCC, regarding the bid for Pillar late last year has caused the broker to query such acquisitions as a means to growth. The company remains upbeat about the medium-term opportunities, suggesting that it was hard to pursue other meaningful contracts while attention was focused on the Superpartners integration.

Regardless, while Citi is optimistic about Link's ability to win new contracts over time, the lead time required for bringing funds on board and converting these to revenue suggests this is more likely to be a medium term rather than the short term feature for revenue growth.

FNArena's database shows one Buy rating (Macquarie) and four Hold. The consensus target is $8.29, suggesting 10.7% upside to the last share price. Targets range from $8.10 (UBS) to $8.50 (Macquarie).
 

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