Company Overview: Link Administration Holdings Limited (ASX: LNK) is a technology-based company, which is engaged in offering outsourced administration services for superannuation fund administration, corporate markets, and related value-added services. Besides, the company also provides value-added services in the areas of digital communication, data integration and insights, and stakeholder education and advice.

LNK Details

Expansion in Newer Markets and Higher Investments Aids LNK: Link Administration Holdings Limited (ASX: LNK) is engaged in the provisioning of technology-enabled administration, securities registration, and asset services, for listed and unlisted corporate entities, and pension and superannuation funds throughout the world. The market capitalisation of the company stood at ~$2.31 Bn as on 24 July 2020.  The company has taken several important measures to become one of the top worldwide organisations. In doing so, it recently realigned its business structure to enhance and support service delivery for clients all over the world. From FY2020 beginning, the company’s business will consist of five global segments, including Retirement & Superannuation Solutions, Corporate Markets, Fund Solutions, Banking & Credit Management and Technology & Operations.

In FY19, the company’s reported revenue and operating EBITDA increased by 17% and 6% year over year, respectively.  The company remains on track to continuously develop its diverse workforce, which includes culture, maintaining its corporate governance practices, delivering on its clients’ expectations, remaining attentive regarding security and data privacy, and providing adequate returns to shareholders. The company also expanded its operations in Hong Kong, India, Italy, the Netherlands, and Luxembourg, which is likely to aid future revenue opportunities.

Although the company witnessed an adverse impact in some areas of its business due to market volatility led by COVID-19, it, however, implemented a plan to safeguard the well-being of its employees, clients and other stakeholders and support operations across all business units. The revenue profile of the group is diversified across jurisdictions and service offerings. The company operates a sustainable business with strong recurring revenue of more than 80%. The company has also executed a comprehensive response plan in response to the coronavirus pandemic, with greater than 90% of its worldwide workforce equipped with the ability to work remotely. The company expects revenues to recover over the medium to long-term as the recovery in asset markets has started.

The company witnessed a compound annual growth rate of ~23% in revenue over the period covering FY2002-FY2019, which depicts that the company’s revenue has grown to over $1 billion over the same time span, evolving from a share registry business to a provider of technology-enabled outsourced services. Notably, the company has combined more than 40 businesses in the past 15 years, with more than 90 superannuation fund migrations since 2008. Robust underlying member growth in Retirement & Superannuation Solutions (RSS) and expansion into newer markets like Italy, India, the Netherlands, Hong Kong, and Luxembourg, has supported the growth of the company. Moreover, continued investment in key technology platforms to deliver better end-user experience and operational competences is a key catalyst for the future.

Revenue Trends (Source: Company Reports)

Going forward, the company believes that the banking and credit management division is likely to benefit from an increase in distressed loans and expects ramp-up of opportunities in newer markets like China and India in the medium to long-term. It is worth noting that, the company had processed payments of $3.65 billion for 0.5 million members with respect to retirement and superannuation solutions as of 5th May 2020. The company continues to work with European regulators and clients to attain pre-completion approvals for Pepper European Services (PES) acquisition. 

Half Yearly Results Highlights: During the six months ended 31st December 2019, the company reported revenue amounting to $624 million, down 4% on pcp. Operating EBITDA came in at $163 million, down 11% on pcp. Operating NPATA also went down at the same rate and stood at $81 million. The company has undertaken a simplification and transformation plan by realigning its five global business units and expects around $50 of annualised savings by the end of FY2022. Operating earnings per share in 1HFY20 were 15.2 cents per share, down 11% year over year. Recurring Revenue remains an important part of the company’s business, underpinning its’ resilience and representing 84% of 1H 2020 Revenue. Recurring revenue came in at $521.6 million in 1HFY20. The company declared an interim fully franked dividend of 6.5 cents in 1HFY20.

1HFY20 Key Highlights (Source: Company Reports)

Retirement & Superannuation Solutions (formerly Fund Administration): Total revenue from this segment decreased from $275.9 million reported in 1HFY19 and came in at $259.6 million. The company witnessed client losses during the period which was partially offset by growth from underlying members and contracted price escalators. An increase in non-recurring revenue during the year was aided by a few huge regulatory projects.

Corporate Markets: The company reported revenue of $183 million, as compared to $191.9 million reported in 1HFY19. Revenue was down due to lower non-recurring revenue, which was partially offset by an increase in Recurring Revenue.

Fund Solutions: The company reported revenue of $86.1 million, up 8.1% year over year. Revenue was up due to high recurring and non-recurring revenues. Further, robust performance underpinned by growth in AUM resulting from new clients, new funds and growth in existing funds support the segmental increase.

Banking and Credit Management: The company reported revenue of $83.8 million, down 5.4% year over year. The company witnessed robust European expansion with strong revenue growth in Italy and acquisition-related growth in the Netherlands, partially offsetting lower revenues in the UK and Ireland. 

Technology & Operations: The segment reported revenue of $188.7 million, up 12.8% year over year, indicating solid growth in both internal and external revenue.

Segmental Highlights (Source: Company Reports)

Balance Sheet & Cash Flow Position: The company exited the period with a cash balance of $148.8 million. The company’s net debt at the end of the period came in at $707.1 million. The company’s net debt increased primarily on account of higher PEXA investment completed in January 2019, higher investments, and share buyback programs. Operating cash inflow in 1HFY20 came in at $180.7 million as compared to $158.9 million in 1HFY19. Net cash provided by operating activities after tax and interest, came in at $112.4 million, up 52% year over year. Capital expenditure for the period came in at $48.8 million. Net operating free cash flow for the period stood at $49.5 million as compared to $19.2 million in the year-ago period. Notably, the company has adequate undrawn and committed credit facilities to support liquidity. 

Top 10 Shareholders: The top 10 shareholders have been highlighted in the table which together forms around 32.22% of the total shareholding. Perpetual Investment Management Limited is the entity holding maximum shares in the company at 8.78%. Yarra Funds Management Limited is the second-largest shareholder, representing a holding of 5.39% in the company.

Top 10 Shareholders (Source: Refinitiv, Thomson Reuters)

Key Metrics: In1HFY20, the company had a gross margin of 91.1%, which was higher than the industry margin of 75.3%. Debt-to-equity ratio for the period stood at a decent level of 0.53x, reflecting the funds raised for acquisition.

Key Metrics (Source: Refinitiv, Thomson Reuters)

Key Risks: LNK’s business is sensitive to Information and cyber security risk, which arises from the inability of the company to maintain data security. These risks might impact on the group’s reputation, financial performance, and ability to achieve its strategic objectives. The group’s performance is also exposed to uncertainty pertaining to the political and regulatory environment, which can affect its business objectives. In response to this risk, the company has diversified its geographic and jurisdictional presence. Further, stiff competition and leveraged balance sheet add to the woes.

Outlook: Previously, the company had suspended its FY20 guidance due to market volatility. However, the company is confident about a decent medium-term outlook with business growth opportunities. Despite recent client losses in 1HFY20 and continued competitive pricing pressures in corporate markets, the company remains positive about its expanded operations in Hong Kong, India, Italy, the Netherlands, and Luxembourg. Moreover, the company is looking forward to drive growth from the increased investment in PEXA, exploring newer avenues in the UK pensions market and is well-positioned to take advantage of super fund consolidation in Australia.

The company also remains focused on preserving cash flow to reduce net debt. Further, the company has a strong business and revenue model to support positive operational cash flow. Further, the completion of the PES transaction will increase leverage of the company. The company believes that continuous focus on client retention, higher investment in new products and existing product innovation will drive growth in the coming future.

Key Valuation Metrics (Source: Refinitiv, Thomson Reuters)

Valuation Methodology 1: P/E Multiple Based Relative Valuation (Illustrative)

Valuation Methodology 2: EV/EBITDA Multiple Based Relative Valuation (Illustrative)

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

Stock Recommendation: The stock of the company went up by ~31.82% in the last three months and is currently trading below the average of its 52-week low and high of $2.640 and $6.98, respectively. LNK is well placed to operate through current challenges and has undertaken numerous actions to increase financial resilience. The company is focused on preserving cash flow to reduce net debt. We have valued the stock using the P/E and EV/EBITDA multiple based illustrative relative valuation method. The company is likely to release its FY20 results in August 27, 2020. For the purpose, we have taken peers such as Computershare Ltd (ASX: CPU), Perpetual Ltd (ASX: PPT), and TechnologyOne Ltd (ASX: TNE), to name few, and arrived at a target price of lower double-digit upside (in percentage terms). Therefore, considering diversified revenue profile, resilient earnings, focus on preserving cash, and long-term outlook, we give a “Buy” recommendation on the stock at the current market price of $4.28 per share, down by 1.609% on 24 July 2020.

LNK Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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