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Mid-Cap

Link Administration Holdings IPO – The biggest of this year, but is it the best?

October 22, 2015 | Team Kalkine
Link Administration Holdings IPO – The biggest of this year, but is it the best?

Business Model:

Link Administration Holdings derives its revenue through the contracted services to clients across Fund Administration, Corporate Markets and Information, Digital & Data Services (IDDS), wherein customers pay contracted fees according to the Volumes and activity or services offerings.Contracted fee arrangements would include fixed as well as variable fee components according to the complexity and scale of the services delivered. Over 90% of the Link’s revenue is recurring (revenues from contracted core administration services, stakeholder engagement services, share registry services and shareholder management and analytics services that are not related to corporate actions). The group also built a diversified base wherein its top two clients are estimated to contribute over 29% in FY2016 revenues while its top five clients are likely to comprise 46% of FY2016 revenues. Link Group’s clients are divided into two major groups which include Australian superannuation and pension funds as well as listed companies in Australia, New Zealand, Europe (with United Kingdom), the Middle East, Asia (with Hong Kong, Singapore and India) and South Africa. Australia and New Zealand market is estimated to account over 90% in the fiscal year of 2016 revenues.


Pro forma Results (Source: Company Reports)

Solid penetration in the Australian superannuation fund administration market:

The group built over 30% market share in the Australian superannuation fund administration market, which has an addressable market size of more than $2 billion per annum. Link group grew its revenues at a compounded annual growth of 23% during fiscal years of 2002 to 2015 years while operating EBITDA improved by a CAGR of 24% during the fiscal years of 2002 to 2015. The firm invested over $300 million in proprietary technology platforms since the last nine years while its Australian superannuation administration total expense rose by 9% per annum during fiscal years of 2004 to 2014. Link Group’s clients grew by over 6% per annum in fiscal year of 2004 to 2014. Management estimates to deliver the first dividend of over $27 million, or 7.4 cents per share for the six months to 30 June 2016, which would be payable in October 2016. The dividend is estimated to account over 56.5% of FY2016 pro forma NPATA before significant items. Accordingly, the management estimates a dividend payout ratio in the range of 40% and 60% of the Group’s annual NPATA. Meanwhile, Link Group manages financial ownership data for >2,300 clients across the world and offers services to > 10 million superannuation account holders and 20 million individual shareholders.
 

Growth Strategy:

Superpartners is a superannuation fund administration provider that was earlier owned by five superannuation funds, which undertook a competitive tender process to outsource superannuation fund administration services to their respective funds. Link Group entered into service contracts with an initial term of five years with each of the five superannuation funds and also acquired Superpartners as a part of the tender process in 2014. Accordingly, Link Group would derive these acquisition synergies in fiscal year of 2016. Australia is now the world’s fourth major private pension pool based on FuM. Australian superannuation industry would continue to grow while FuM is estimated to double by 2029, as per the Rice Warner data. Link group intends to leverage the growing outsourcing of superannuation fund administration and has built solid product and services. Meanwhile Link group intends to continue to focus on its business combination strategy (delivered around 30 business combinations over the last 10 years and improve its client base as well as product and regional base.
 

IPO offer Highlights:


Offer Details (Source: Company Reports)

Link Administration Holdings Limited (proposed ASX code: LNK) would be listing on Australia Stock Exchange on October 27, 2015 and recently opened a retail offer in the price range of $5.41 to $6.37 in ASX through which the group would be raising an amount worth of over $879.2 million to $946.5 million. The company expects to have a price to earnings ratio of between 21 times and 24 times when being listed and the market is trading at about 18x. The share price looks to be little high considering the proposed P/E in comparison to 18x P/E ratio for the market. Further, it is said that a forecast of dividend yield of about 2.4% to 2.7% has been made. The expectation to have 74% surge in pro-forma EBIT in 2016 also looks quite uncomfortable considering the continual fall in EBIT from 2013.
 
Link group’s market capitalization might be in the range of over $2.0 billion to $2.3 billion while the enterprise value of the group might be over $2.3 billion to $2.6 billion. The Group’s present shareholders would hold 211.2 million shares or 58% of the about 366.2 million shares on issue post the offer completion. Meanwhile, the group’s management shareholders would hold around 28.9 million shares which is over 87% of their present holdings. Pacific Equity Partners would hold over 110.8 million shares which is over 74% of their present holdings. We believe that the IPO price range is relatively high and accordingly we give an “Expensive” recommendation to Link Group.

 
Shareholding highlights (Source: Company Reports)

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Kalkine is a trading name of Kalkine Pty Ltd ABN 34 154 808 312, which holds Australian Financial Services Licence No. 425376.

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