Learn To Invest
Stocks Special Reports LICs Credit Funds ETFs Tools SMSFs
Video Archive Article Archive
News Stocks Special Reports Funds ETFs Features SMSFs Learn
About

News

Opportunities for investors in Link

Mark LaMonica, CFA  |  28 Aug 2020Text size  Decrease  Increase  |  
Email to Friend

Narrow moat-rated Link Administration remains significantly undervalued says Morningstar equity analyst Gareth James, despite reporting a 12 per cent drop in revenue and an after-tax loss of $114 million.

Investors headed for the exits on the news and the share price of the financial services admin provider fell by over 9 per cent.

Despite the negative headlines, James has maintained his fair value estimate for Link (ASX: LNK) at $7.70, saying the results “do not represent the underlying financial performance of the company.

The shares are currently trading at close to a 48 per cent discount. 

“Comparison of fiscal 2020 financial statement metrics with the prior year is distorted by the sale of CPCS (Corporate and Private Clients) business and the adoption of the AASB 16 lease accounting standard,” James said.

Australian Accounting Standards Board 16 introduces a single lessee accounting model and requires a lessee to recognise assets and liabilities for allleases with a term of more than 12 months, unless the underlying asset is of low value.

The overall 12 per cent fall in revenue was heavily impacted by the sale of the UK Corporate and Private clients business in 2019.

Excluding the transaction, revenue only fell 3 per cent. James characterised this as a relatively stable performance in light of the covid-19 pandemic and “reflective of the relatively defensive and recurring nature of Link’s revenue.”

Link Adminstration (LNK) - 1YR

Link Administration (LNK) - 1YR

Source: Morningstar Premium

Link Administration is the largest provider of superannuation administration services and the second-largest provider of share registry services in Australia.

It has created a narrow economic moat – which implies a ten-year competitive advantage – in the Australian and UK financial services administration sectors via its leading positions in fund administration and share registry services.

Client retention rates exceed 90 per cent in both markets, underpinned by inflation linked contracts of between two and five years.

James expects Link to benefit from continued outsourcing of fund administration functions, which are expected to accelerate as the industry consolidates.

Outgoing Link managing director John McMurtrie suggested that industry consolidation had been put on hold due to the covid crisis, but talks had resumed.

"The big game at the moment is further administration inflows and the potential for fund mergers,” McMurtrie said.

“We believe our client base will be in the ascendant in those conversations." 

Another source of growth for Link is the real estate transaction platform PEXA. Link has a 44.2 per cent stake in the company, which saw transaction volume grow by 37 per cent in fiscal 2020.

In addition to continued revenue growth, James also expects cost-cutting to further boost Link’s profitability. He lauds the capital-light business for its cash conversion capabilities and forecasts steady dividends.

Link announced a final dividend of 3.5 cents per share, 50 per cent franked.

Visit Morningstar's Reporting Season 2020 coverage. The calendar will be updated daily to connect you with our equity analysts' take on the financial results. 

is a product manager, individual investor, Australia.

© 2021 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'regulated financial advice' under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information, refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Morningstar’s full research reports are the source of any Morningstar Ratings and are available from Morningstar or your adviser. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782. The article is current as at date of publication.

Email To Friend