Back in December I wrote on the investment case of Link Administration (LNK) and I thought today I’d update my view on a stock I believe has excellent medium-term growth prospects.
LNK is a classic “top down meets bottom up” mid-cap ($2.9b market cap) investment idea. It has strong top down leverage to the structural growth in the Australian superannuation system, and bottom up leverage via acquisition and cost out. LNK remains the no.1 play on the Australian superannuation services growth sector in my opinion.
Since I last wrote on LNK there has been a very well absorbed sell down of 15% of the company from its private equity owners, and interim result that was above prospectus, and a trading update given by the company last week at the Macquarie Australia Conference. All three of these events have given me even greater confidence in the LNK investment case and the AIM Global High Conviction Fund has increased its holding in LNK.
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 LNK, “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, 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 LNK’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 years ahead using consensus forecasts.
All those forecasts are moving in the right direction. Revenue growth, earnings growth, dividend growth, ROE growth, debt coming down. Free cash is also increasing each year in the forecast period.
Outlook was also confirmed which is another positive.
As you know my core investment approach is “price to growth”, or PEG ratio investing. LNK offers 3 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).
LNK is another classic “AIM Investments” idea. 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.
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 growthless, large cap Australian market. The P/E is higher because the GROWTH is higher and sustainable.
Our final attraction to LNK 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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