Morningstar retains Link FVE despite suitor exit

Morningstar analyst Gareth James has left his fair value estimate for takeover target Link Administration unchanged despite the withdrawal of a potential suitor from the US.

Link Administration (ASX: LNK) fell by more than 14 per cent in early trade following the news that Nasdaq-listed SS&C Technology Holdings had withdrawn its $3 billion offer for the Australian share registry and financial services company.

James played down the exit of SS&C, and the subsequent drop in Link’s share price, saying it was normal for bidders to throw up an indicative price, as a means to conduct due diligence without necessarily having the conviction to follow through.

“They never had anything hard on the table,” James says. “It was never a formal offer. Unless SS&C have found something that’s freaked them out, which is a common thing for the market to assume, but it would have to be disclosed by the company.

“The other thing the market may be concerned about is that there is no longer bidding tension now, so there won’t be a big incentive to push [rival bidder Private Equity Partners] PEP higher.”

James said it was part and parcel of the drama of equity markets and that he wouldn’t be surprised to see the share price claw back some of Monday's fall. Link is currently trading at a 28 per cent discount to James’ fair value estimate of $7.70.

“It’s frustrating for shareholders. Imagine if you were selling your house and the real estate agent said ‘$1.5 million. Let’s put it on the market.’

“You get a buyer and tell your friends you’re moving out, and then the buyer pulls out. You’d be angry and it may cause you problems in the short-term, but you wouldn’t conclude the house was no longer worth $1.5 million. It doesn’t change much unless the buyer says they found termites or something. That would change things.”

Link had earlier rebuffed SS&C’s $5.65 per share offer and had asked the software firm to offer a better price, despite it being nearly 5 per cent higher than a rival bid from private equity firms Carlyle Group and Pacific Equity Partners.

The Link Group Board will continue to consider all alternatives, including the sale of its interest in Torrens Group Holdings and its core asset PEXA from 18 January, the company said. Torrens Group Holdings is the holding company for the shareholding in PEXA.

Link Administration (LNK), Computershare (CPU) - 3YR

Source: Morningstar Premium

Link, which also provides services to fund managers and trading firms, said in October it was looking at potentially spinning-off PEXA, an online property transaction firm owned 44.2 per cent by Link, into a separate listed company.

Link Administration has a narrow economic moat based on cost advantages and switching costs, according to Morningstar. The company has a leading 30 per cent market share in Australian fund administration; this is three times the size of the second-largest provider, with little competition beyond that.

Its main rival is Computershare (ASX: CPU), which is the largest provider of registry services in the world, and thus poses a material threat, James says.

“Our fair value estimate for Link is $7.70 per share, which implies a fiscal 2021 price/earnings of 29 times, excluding amortisation of acquired intangible assets, an enterprise value/EBITDA multiple of 15 times, and a dividend yield of 2.6 per cent.

“Our base-case scenario assumes that fund administration revenue, which constitutes around 36 per cent of group revenue, grows at around 4 per cent per year, comprising 1.5 per cent population growth and 2.5 per cent inflation. We assume corporate markets revenue grows at 3 per cent per year, reflecting inflation, and assume no market share gains due to the strength of major competitor Computershare.”

On 10 December, James said that even if a takeover failed to materialise, the continued strong performance of PEXA bodes well for its divestment and potential initial public offering, which could be done in an extremely strong market for technology company IPOs.

“This could crystallise significant value for Link shareholders, concurrent with a recovery of the broader group’s performance. At the current market price of $5.58, we continue to believe Link shares are materially undervalued.”