The “rule of three” goes that good and bad things come in threes. As a fan of beaten up fund administration and registry services provider Link Administration Holdings (LNK), I am hoping that it is only three because I (and many others) have considerable “egg on face”.

The three “bad” things that have hit Link are:

• The announcement by the Government in May 18 of the Protecting Your Super Package, which caps administration fees on low balance super accounts and sponsors the consolidation of inactive super accounts. For Link, which provides back office services to Australian Super, REST and other retail and industry super funds, this means fewer accounts to administer and a hit to fee revenue;
• An earnings downgrade on 31 May, with operating EBITDA expected to be approximately $350-$360m in FY19, compared to a broker forecast of around $385m. Link blamed two main issues – lower business volumes impacting the operation of its European businesses primarily due to the impact of the Brexit outcome in the UK; and super funds preparing for the Protecting Your Super Package by facilitating earlier-than-expected account consolidation and higher costs for Link as the transition gets under way; and
• The shock collapse in early June of the celebrity stock picker Neil Woodford’s $13bn investment funds. Link’s UK Link Asset Services was the Authorised Corporate Director of the flagship LF Woodford Equity Income Fund and is being investigated by the UK’s Financial Conduct Authority. If Link has been negligent in not keeping the Fund within its approved investment mandates or in the processing of investment redemption requests, it could face a fine from the FCA and/or claims from investors who have lost money. Link says that it “has at all times acted in accordance with applicable rules and in the best interests of all investors of the Fund and it will continue to do so” and that it is “co-operating fully with the FCA”.

Link’s share price has been trashed. After trading up near $9 in early 2018, the shares closed on Friday at a paltry $5.41.

Link (LNK) – 10/15 to 6/19

Management’s credibility has been tarnished, firstly because it undertook an opportunistic institutional placement at $8.50 per share just 13 months ago to raise $300m, but more so because one of its alleged strengths was a track record in acquiring and integrating businesses. The 2017 acquisition of the UK based Capita Asset Services is looking  troublesome.

Link paid £888m (approx. A$1.5bn) to purchase Capita Asset Services in November 2017. (This is now known as Link Asset Services). It subsequently divested for £240m the corporate and private client business, but kept the share registry, investment manager and fund servicing, and loan servicing businesses. It made Link a global business, with non-Australasian revenue rising to 49% of the Group’s total. However, this business is now facing headwinds from Brexit and a moribund Europe, and the investigation by the FCA.

Link says that it is still on track to generate more than £15m of savings as the European businesses are integrated and aligned with the Link Group structure. That may be the case, but  a less charitable assessment is that Link has joined the illustrious list of Australian companies that have botched UK acquisitions. Names such as Wesfarmers, National Australia Bank, AMP, Ramsay and Slater & Gordon come to mind.

What do the brokers say?

Although somewhat embarrassed and a little wary, the brokers remain supportive of Link and view the company as undervalued. According to FN Arena (see table below), the consensus target price is $6.99, some 29.3% higher than Friday’s closing price. There are 6 buy recommendations, 1 neutral recommendation and 1 sell recommendation.

Major broker forecasts

In the main, the brokers feel that the earnings headwinds are “short term” and that Link should benefit in the medium term from further outsourcing of super/pension/investment fund administration and other structural  growth opportunities. The recent extension of the Australian Super administration contract is a positive. Apart from the earnings headwinds, the main negative is the uncertainty around the Woodford fund investigation.

In terms of pricing, the brokers have Link trading on a multiple of 14.6 times FY19 earnings and 14.4 times FY20 earnings. Assuming a payout ratio of 50%, this translates into a dividend yield of 3.5% (fully franked).

Here’s my view

I think Link remains a strong business with sold prospects, and despite the challenges with the UK acquisition, management has a track record that is worth backing. The Brexit shambles have gone on longer than anyone anticipated and the super reforms were somewhat from “left field”. On a multiple of around 14.6 times, Link is cheap. Further, Link owns 44.2% of PEXA (Property Exchange Australia), which it will equity account from 18 January 2019. In the medium term, this could prove to be a very material “cash cow” for Link.

Until the Woodford investigation is complete and the ramifications understood, I am not expecting much of a rebound in the share price. However, I am doubling up at these levels.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regard to your circumstances.