Link Administration Holdings Limited (LNK) is the largest outsourced administration services provider for the superannuation funds industry in Australia and is a leading provider of shareholder management and analytics and share registry services to companies in Australia, the United Kingdom and some other European countries.
I believe LNK’s business model is relatively defensive having significant levels of recurring revenue (around 90 per cent) backed by 3-5 year contracts within their funds administration and registry services businesses. The company is well positioned to benefit from additional administration outsourcing and industry consolidation given the significant scale and strategic benefits LNK can provide to these clients. LNK offers low-risk exposure to Australia's growing superannuation industry, as revenue is tied to member numbers, not each fund's assets under management (thereby reducing some risks to market movements). LNK's scalable technology platform results in strong profit leverage to incremental customer/revenue growth.
The business is currently completing the final migration of Superpartners' client information to LNK's platform. The acquisition of Superpartners (Australian Super, CBUS, HESTA, Hostplus and MTAA) in Dec 2014 was transformational, adding around 5 million new members to LNK. A successful migration will be a key driver for the next few years.
Link Administration Holdings Limited (LNK) offers low-risk exposure to Australia's growing superannuation industry, as revenue is tied to member numbers, not each fund's assets under management...(its) scalable technology platform results in strong profit leverage to incremental customer/revenue growth.
The integration of Superpartners continues to track ahead of expectations with an additional $45 million in synergies to be realised over FY18 and FY19. Proactively utilising their strong balance sheet, LNK announced and subsequently completed another transformational acquisition ahead of schedule.
LNK acquired a UK based share registry business (third largest in UK), Capital Asset Services (CAS), which opened up new product lines in banking servicing and trustee services to that market. I believe the accretive CAS’s acquisition is a strategic fit for LNK given CAS’s underlying business also exhibit similar defensive characteristics as LNK (ie. strong market share, and high recurring revenue).
I see value emerging into FY19e on benefits from the CAS and Superpartners synergies. In a rising interest environment we foreshadow bond proxy securities are likely to under-perform the market and securities like LNK with stable and importantly growing dividends should help to off-set some of the underperformance impacting bond proxies.
Once the recent acquisitions have been fully imbedded and debt repaid in the next couple years, there is upside risk from capital management opportunities. At current levels, I believe LNK is trading at a fair valuation in return for their strong medium term outlook.
- This article does not take into account the investment objectives, financial situation or particular needs of any particular person. Accordingly, before acting on any advice contained in this article, you should assess whether it is appropriate in light of your own financial circumstances or contact your financial adviser. Christopher Hindmarsh is an adviser at JBWere Limited. JBWere Limited is owned by National Australia Bank Limited.