Link Administrations Holdings Ltd (ASX: LNK) is a technology-enabled provider of outsourced administration services for superannuation fund administration, corporate markets and related value added services including data management analytics, digital communication, and stakeholder education and advice. Link is the largest provider of services in Australia’s superannuation fund administration industry, which services the fourth largest pension pool in the world based on funds under management.
Link’s idea is simple, yet powerful. It is to “link” people with their financial assets across the world. We can say that Link is the backbone of the financial market. If you have not heard of Link before, you might be surprised while looking at your share registry of some of your stocks, because chances are it is managed by Link. Link is a giant with operations around the world, a diversified business at every level within a niche market. The firm connects individuals, governments, and organisations with their assets which comprise of but not limited to equity, debt, pensions, and property. Link provides its technology to serve retirement and superannuation solutions, corporate market accounts, fund solutions and banking and credit management all well organised into its data and asset platforms.
Link has characteristics that define a stable and dominant business. First, the company has a presence in over 18 different jurisdictions with Australia, Europe and India being its key markets. Over just a bit more than fifteen years in existence, Link is dominating geographically strategic markets with Australia representing 57% of the group’s total revenue, followed by the UK with 25%, Ireland with 10% and the rest of the world with 8%.
The second strong point that Link exhibits is its well-diversified revenue from its four main divisions plus one.
- The retirement and superannuation solution or RSS division is the largest slice of the pie with 33% of the total revenue. The RSS division is what makes Link, Link. It is the core product of the company serving Australia’s key stakeholders including the government, industry, retail and corporate. The RSS solution has no alternative on the market, it offers the most comprehensive superannuation administration solution.
- The corporate markets solution or CM division is 22% of Link’s revenue and is an essential tool for companies to manage their share registry, employee share plans and all the necessary back-office solutions related to corporate markets management. Link provides solutions for fund managers as well. Managing a fund is already demanding and the administration is complicated.
- The Fund solutions or FS division is a growing business segment that supports fund managers in the UK, Ireland, Luxembourg, and Australia through its proprietary platform. Link’s FS solution provides a system for fund administration with a focus on governance, regulations, compliance, and risk management.
- The Banking and Credit Management (BCM) is only 9% of the group’s revenue, for now, however, it is one of the promising growth segments for Link. The company is currently operating the BCM division in Ireland, the UK, the Netherlands, and Italy across the loan lifecycle. The BCM business segment is a very lucrative sector that Link strives to develop. In 2019, the company has announced its intention to take over a subsidiary of one of the key players in the loan servicing business in Ireland, Pepper European Servicing (PES) for two hundred million euros equivalent to $314.4 million. However, in February this year, Link decided to pull out of PES purchase citing its intention to preserve capital for other growth opportunities in the future. The loan servicing sector is one of the key focuses for Link and we clearly see why, for its recurring income stream. Recurring revenue is a highly desirable quality. It makes a business more stable and predictable operationally and financially. That is the case for Link with its impressive 84% of its revenue being a recurring income stream.
- Last but not least is the T&O division for Technology and Operations. It is a relatively new business segment. T&O is more of a transversal business segment. It is the foundation of all Link’s products and solutions. The “technology and operations” division is the fruit of Link’s intention to leverage its extensive technical expertise in the financial market. And actually, it is now a growing business segment in the company that is surprisingly becoming the second-largest chunk contributing to 25% of the company’s total revenue.
FY20 challenge of COVID-19 revealed a company with a quality management team and great execution
Despite all the difficulties induced by the pandemic, Link performed exceptionally. We have seen the company stay on course by delivering new processes, systems, and technology to facilitate over 1.2 million transactions for the Early Release of Super (ERS) scheme. That was a very urgent matter that required agility and within just five days, Link was able to work along with the regulator to process 96% of the ERS payout. Link has been well appreciated for its quick response and great execution by the Australian regulators. Through its RSS and T&O division, the firm collaborated with regulators and its superannuation fund clients to develop fraud detection tools mandatory by the ERS scheme. Along with exemplary execution and collaboration with its existing clients which contributed to maintaining long-term trust, hence securing long-term recurring revenue, Link also worked on expanding to new markets. The group has shown intention during FY19 to become PEXA’s largest investor.
PEXA, the biggest IPO since 2018
Just a few days ago, PEXA had its debut on the ASX. It was the biggest initial public offering since the last three years with a three-billion-dollar IPO. Link took the biggest stake with 42.8% while CBA (ASX: CBA) has lifted its slice from 15.8% to 23.9%. Through this operation, Link is getting exposed to the residential property sector which is, by the way, Australia’s largest asset class. PEXA has gone from strength to strength in FY20. PEXA has now on its platform a network of over 150 financial institutions, about 8,900 legal and conveyancing firms, along with the 6 largest developers, land registries and state revenue offices across Australia in which 96% of the Australian properties are located. PEXA is massive. It is hard to realise that 75% of all property settlements nationally are done through PEXA. That is $990 billion settled on the platform. One positive thing out of the COVID crisis is that it has helped PEXA to accelerate its conversion to its digital platform. We expect PEXA to continue to perform strongly onward FY21. For now, PEXA’s revenue contribution to Link is marginal but it opens the door to huge adjacent market opportunities. As of the first half of FY21, PEXA brought in $0.4 million compared to Link’s total revenue of $597 million.
FY21 onward outlook: Continuing expansion into Europe along with the global transformation programme
Link plans to grow through five key drivers. We can surely say that Link is the backbone of the financial market. As long as the market is growing, Link will develop alongside. That is the first key driver of growth Link will focus on.
- We have seen Link expanding its client base year-on-year and we expect it to continue steadily onward.
- Link has been prioritising its products innovation also which was well-received during the pandemic. The company developed platforms and technologies helping its clients to operate efficiently online. On top of that, the company realised that technology is playing an important role in today’s life and business,
- The development of the T&O division which is now contributing to 25% of the group’s revenue.
- As of today, 57% of the revenue generated by Link is coming from Australia and that is going to change quite rapidly as Link is embarking in a pharaonic effort to expand in other regions.
- Expansion does not mean only geographically but also in new markets such as with the recent PEXA’s IPO which will give access to the lucrative housing market.
Link is advancing on different fronts. The growth of its UK and European operations continued throughout FY20, initiating with the partnership and investment in Smart Pension as announced in November 2019. This strategic partnership provides Link with an established entry point into the $4.64 trillion UK pensions market. We have also seen the company releasing new product innovations and technology solutions in the pension and retirement space.
On top of these efforts to continuously grow, Link announced last year its aim to undertake a global transformation programme to deliver $50 million in annualised savings by the end of FY22. The transformation programme involves consolidating the group’s premises and vendors and improving the company’s operational efficiencies through the implementation of a global hub strategy. Since last year, Link has progressed swiftly with its centres of excellence and strategic hubs in Australia, India, the UK, and Ireland. Due to COVID-19, the transformation programme has been a tad delayed. Progress on the transformation programme has now re-started and we are confident that Link will achieve its target cost savings according to its schedule by FY22.
Solid fundamentals providing a platform for growth
For the first half of FY21, Link reported revenue of $597 million with an Operating EBIT of $79 million and an Operating NPATA of $65 million. The performance was in line quarter-on-quarter despite the group facing some headwinds due to COVID-19. Link has demonstrated financial resilience and has successfully navigated through tough conditions. What we like about Link’s financials is its high levels of recurring revenue and strong free cash flows which supported the company to stay afloat despite being challenged on multiple fronts. Recurring revenue accounted for 84% for the first half of FY21 compared to 82% in the previous period while cash flow conversion was underpinned by positive working capital performance.
Link has been affected by Brexit, COVID-19, superannuation regulatory reforms and the ERS scheme to name a few. However, we are sure that the marginal decrease in the group’s revenue is just temporary due to these unprecedented events. Furthermore, during the first half of FY21, Link started to undertake a handful of important steps in the delivery of its global transformation programme. The group has already brought $32 million of annualised benefits and confirmed the target of annualised benefits to reach $75 million by the end of FY22.
Link is a solid business in our view with reliable cash flow and a strengthening balance sheet. The company managed to decrease its net debt/operating EBITDA to 2.4 times and stabilised its interest cover ratio above 11 times during the period. We think that FY20 and FY21 will be the year dedicated to building the foundation for future earnings growth from FY22 onward. Link has exhibited strong market positions with clear strategic ambitions.
Link, a predictable and stable business
Recurring revenue has the advantage of bringing stability and predictability in business operations and the company can better plan and sensibly allocate its capital to grow organically. The nature of Link’s revenue allows the company to offer a reliable dividend payout. Since the last three years, the company has never failed to provide a stable distribution which is currently over 1.5% dividend yield and lots of potential to the dividends to grow.
Forecasts & Valuation
Link has been quite bullish since the COVID-19 global market sell-off in March last year and has since appreciated by a remarkable 92% reflecting the company’s consistent fundamentals.
We have already mentioned in great length regarding the stability and predictability of Link’s revenues and their expansion plans. The company also seems to operate with a stellar 90% gross margins consistently and we do not expect this to dip. Therefore, we project a positive forecast for Link’s revenue growth and profits – underpinned by very steady margins.
Regarding Link’s multiples, we saw a fairly valued share price with an estimated EV/EBITDA a little bit more than thirteen times for FY21 based on our revenues and earnings estimates. We believe Link has the potential to keep expanding as backed by our forecasted revenue at a CAGR of 9.8% for the next 3-year period with a stable EBITDA margin which gives us strong confidence in the company.
The ASX 200 index has an average P/E ratio of 22.7x and an average EV/EBITDA ratio of 14.5x. Relatively, Link’s shares are still quite cheap compared to the overall market. With the transformation programme in progress, which will contribute to improving further the company’s margins and a progressive return to a favourable economic environment, we believe it is an opportunity to consider Link in your portfolio.
As most of the stocks during the first quarter of 2020, LNK was affected by the COVID-19 market sell-off which sent its share price to it’s all-time low at $ 2.64. Throughout 2020, LNK recovered remarkably back to near its pre-COVID level, up by +92%. However, LNK still remains 35% below the pre-pandemic high which gives us some room for an opportunity to catch the gains from the gap to be filled. We have also witnessed a recent increase in volume in the last 20 days which may suggest that buyers are building up their positions in anticipation of a potential breakout of the $5.5 near-term resistance.
Key price levels
LNK has found its price equilibrium at the psychological level of five dollars per share. Link has been pretty flat since the beginning of the year, unlike the RSI indicator which has found support on an upward trend line. The price-RSI divergence and the RSI pointing above its 50-level threshold may suggest an imminent bull-market rally.
Volume and momentum
Volume increases since the last 200-day with the 20-day volume average up by 34%. The price action remains neutral in the near term, evolving in a range between $5.68 and $4.5 per share.
- LNK has found its price equilibrium at the psychological level of $5 per share. We think that Link’s price action will remain consolidated at this level until the next earnings report. We suggest buying LNK between $5.35 and $4.52 per share and monitor closely the lower range at $4.5.
Link is a well-diversified business with an expanding footprint in key growth markets. One of Link’s advantages as a company and we are sure no one will disagree, is the highly recurring nature of its revenue which is 84% of the $1.2 billion total revenue of the group. The gross consistency in hitting over 90% gross margins is just Link flexing its muscles. FY20 and FY21 may be considered as the years where Link is solidifying its position to get ready for the return of earnings growth from FY22 onwards. Therefore, we suggest stepping in early before it is getting crowded. We recommend a “Buy” for our long-term investors.