Roy Davidson

Stock Comment - Link Group LNK

Link Group (LNK) is an Australian based superannuation fund administrator and share registry. It is the largest super fund administrator in Australia, and the second largest share registry. LNK also has operations in New Zealand, Asia, Africa, the Middle East and Europe. The company was founded in 2000 and has over 4,000 employees.

LNK has three operating divisions, fund administration, corporate markets and information, digital & data services (IDDS). Fund administration is the largest division, accounting for 60% of revenues, with the other two divisions accounting for 20% each. Following the acquisition of Superpartners (an administrator owned by its five customers) in late 2014, LNK is the largest super fund administrator in Australia with around a 40% market share. Its services include data management, member communication and statement processing. The corporate markets business predominantly undertakes share registry services and shareholder management. The IDDS division is the technology hub of LNK and provides and maintains the proprietary IT for the other two divisions, as well as providing data services to a growing number of external clients.

LNK generates defensive cash flows with approximately 91% of its revenue recurring. Its customers are very sticky with the cost and time taken to change providers acting as significant deterrents to switching providers. These customers also tend to be large blue chip corporates with contract tenors of 3-5 years. Pricing is predominately inflation linked. LNK’s historic earnings have displayed little volatility, and earnings are not sensitive to the level of corporate activity or interest rates.

We expect LNK to deliver strong earnings growth for the next two to three years as it transitions Superpartners accounts onto its platform. The speed at which LNK can transition these member accounts, and thereby drive cost synergies, will be a key earnings driver. Management expect the migration to be completed by FY19. Acqusitions are a key part of LNK’s strategy. After missing out on several opportunities in Australia, LNK recently announced the large acquisition of Capita Asset Services in the UK. The business has similar characteristics to LNK’s Australian business and we see this as providing an additional leg of growth for the company. However, we note that the risk profile of the business has increased.

LNK is a defensive business with high barriers to entry and strong cash flow generation. The company has a successful track record in growing earnings and integrating new businesses, and its management team has a long tenure with the business. LNK’s strong market position and lower cost to administer leads to strong potential to grow market share and earnings. Overall, we believe LNK is a good fit for portfolios, providing a stable exposure to the Australian financial sector and earnings to grow from achieving operating efficiencies from recent acquisitions.

Potential downside risks for LNK include 1) increased competition, 2) regulatory issues, and 3) acquisition risk.