As you know last month we significantly increased the AIM Global High Conviction Funds weighting in Australia. This was based off the view that ASX200’s underperformance of Wall St in US dollar terms was just too wide (-19%) and secondly that the Australian economy is doing better. Thirdly, I think there’s “growth at a reasonable price” to be found in the right Australian industrial equities.
The final piece of the puzzle is we think the Federal Reserve’s much anticipated “lift off” will in reality be a “dovish hike”. I explain next week what that means, but it should see the AUD and ASX200 rally into year-end as macro hedge fund traders cover their massively profitable short positions. We maintain the target of ASX200 at around 5400 in January.
Interestingly, most of the earnings growth to be found in Australian equities is NOT in the top 20 heavyweight stocks. They tend to offer reliable dividend yield, but lack earnings growth. We have, and continue to, look for earnings growth (at a reasonable price) outside of the top 20 heavyweight stocks.
That clearly includes new IPO’s and secondary raisings funding growth. Last week, I ran through our investment thesis on the newly listed small cap Baby Bunting (BBN), where we see structural growth. We’ve also backed John McGrath’s float (Monday 7th), feeling John has the ability to drive earnings growth by consolidating the highly fragmented real estate agent sector. It appears we are not alone in backing McGrath, with John attracting a high quality institutional register in an IPO process that was heavily oversubscribed.
There is growth in these newly listed companies and my core belief is you can ONLY make sustained capital gains in companies that are sensibly growing their businesses.
What’s even better is when you find a structural grower in a structural growth industry. That’s what I think Baby Bunting will prove to be, and today I want to talk you through the investment case for Link Administration (LNK), at $2.7b the largest IPO of 2015 in Australia.
Link has been listed for a little over a month and has performed very well. The stock has rallied from $6.37 to $7.30, seeing a high around $7.50. It would appear to me via analysing the price action and volume that IPO staggers have been cleaned out by investors who want to back LNK over the medium-term, such as my fund.
Thankfully, we secured an excellent allocation in the LNK float and have since added to our position as we have gained greater confidence in the growth forecasts for the company.
As in the BBN example, we are starting to see the first broker research produced on LNK and it is positive, focused on the growth profile and dominant industry position.
I am assuming most of you haven’t heard of Link, or at least don’t know much about it, although if you own Australian shares, you have more than likely received fund administration services from them in one way or another.
To quote Macquarie’s analyst on Link… “Linking it all together” is what LNK does. That’s a good way of thinking about LNK in terms of Australia’s superannuation industry.
In a nutshell, Link Administration (LNK) is the largest provider of fund administration services to Australia’s superannuation industry. They are a leading provider of shareholder management and analytics, share registry and other value-added services to corporate clients in Australia and nine other countries. LNK’s leading market positions are underpinned by the functionality and integration of its proprietary technology platforms.
These proprietary technology platforms are considered market leading. They administer financial ownership data for over 2,300 clients globally, which services an underlying base of 10 million superannuation account holders and over 20 million individual shareholders.
The fund administration business accounts for over 60% of gross revenue, while corporate markets and information, digital and data account for the other 40%, evenly split. Australia and New Zealand account for nearly 90% of group revenue.
Scale is Link’s greatest advantage. There should be no doubt that LNK has a scale advantage in Australia, but most notably in the fund administration business. According to Macquarie Research, “This scale, together with the operational efficiencies provided by the significant investment in technology, has established Link Group as a low-cost, high–quality service provider which in our view is uniquely positioned to capitalise on the growth of the Australian superannuation sector”.
“The Fund Administration business has established a significant scale advantage post the Superpartners acquisition (doubled revenues), with 9.3m members as at June 2015. This is several times the size of the nearest two largest competitors (Pillar & Mercer). This scale, together with its significant investment in its platforms, allows LNK to provide administration services to superannuation funds at a lower cost than competitors which creates substantial barriers to entry”.
That SuperPartners deal was the one that cemented the investment case and growth profile for LNK. There are very substantial synergies as LNK migrate clients onto their own platforms. Synergies could be as high as $100 million, which is a key driver of future earnings growth.
It’s worth remembering, however, that LNK is not a newcomer to delivering GROWTH. Between 2002- 2015 LNK delivered a compound average growth rate (CAGR) of +22% at the revenue level and +25% at the EBITDA level. For the FY16 year as a listed company, analysts estimate another year of +27% revenue growth translating to +22% EBITDA growth. EPS should grow +20% or slightly more.
As 90% of revenues are recurring visibility is high in terms of forecasting. Let’s have a look at the investment arithmetic for LNK in the year’s ahead using consensus forecasts.
[1]All those forecasts are moving in the right direction. Revenue growth, earnings growth, dividend growth, ROE (return-on-equity) growth and debt are all coming down. Free cash is also increasing each year in the forecast period.
As you know, my core investment approach is “price to growth”, or PEG ratio investing. LNK offers three years of solid double digit EPS growth (forecast) and is trading on a PEG ratio of slightly over 1x in each of the forecast years.
To me that is cheap for a structural growth stock in what is a legislated structural growth sector. That growth sector could even see further legislative support if compulsory superannuation contributions increase in the years ahead (likely).
It meets. and exceeds, all the variables we look for in an investment and we have built a significant holding in the stock in line with the medium-term investment thesis above.
I really feel this could prove a structural grower, in an earnings and dividend upgrade cycle over the next few years.
Link (LNK) is one way we have increased our exposure to Australia, but it is exposure to a structural growth sector in what we believe will be a structural growth stock. Structural growth is NEVER cheap on raw P/E’s and ALWAYS trades at a P/E premium to the broader, somewhat growth-less, large cap Australian market. The P/E is higher because the GROWTH is higher and sustainable.
Our final attraction to Link is it is not beyond the realms of possibility that it becomes a takeover target (through time) for a global player looking for exposure to the Australian superannuation system.
This is a genuine larger mid-cap industrial stock that we feel has a bright future.
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