Link Administration Holdings: A tough year with a flatter FY22 outlook

About the author:

Richard Coles
Author name:
By Richard Coles
Job title:
Senior Analyst
Date posted:
27 August 2021, 6:00 AM
Sectors Covered:
Insurance, Diversified Financials

  • Link Administration Holdings (ASX:LNK) released a FY21 result that was a touch under consensus and MorgansE (~A$120m) at the operating NPATA line (~A$113m). The share price weakness on result day, in our view, could be attributed to softer FY22 earnings growth guidance than expected on further reinvestment into LNK operations/normalisation of costs.
  • Management guided to a FY22 operating EBIT broadly in line with FY21, and low single digit revenue growth. LNK also announced a A$150m on-market share buyback.
  • We lower our FY22F/FY23F operating NPATA by 3%-7% reflecting more conservative divisional EBIT margin forecasts. Our price target is lowered (login to view target price) on the above changes. We anticipated FY21 as the year of consolidation for LNK and despite a flatter earnings trajectory into FY22, we believe there is inherent value in LNK at these levels. Add maintained.

Event summary

LNK released a FY21 result that was a touch under consensus/MorgansE (~A$120M) at the operating NPATA line (~A$113m).

The statutory loss of A$163m was due to a one-off non-cash impairment related to the BCM business (~A$183m). LNK group revenue was A$1.16bn (-6% on pcp) and broadly in-line with MorgansE/consensus. A 2H21 dividend of 5.5cps was announced (in line with consensus).

It was tough year for LNK overall, as it rebased its earnings, with all 4 business units experiencing negative operating EBITDA growth.

The good

With LNK maintaining a ~42.8% holding in PEXA, the strong performance by the exchange was a result highlight, in our view. PEXA reported revenue of A$221m (+42% on pcp), with A$110m pro forma EBITDA from 3.3m property transactions (+37% on pcp). PEXA contributed 29% (A$15m) of LNK’s FY21 operating NPATA and this is forecast to rise to ~A$25m in FY22.

Retirement and Superannuation Solutions (RSS) has maintained strong underlying member growth (+6.5%), offsetting PYS/ERS impacts. We expect the majority of these impacts to have washed through by end of FY22. FY21 saw the contract renewals of Hostplus (full year impact from contract win expected in FY22), Cbus and HESTA . RSS FY21 recurring revenue also increased to 90% (FY20 = 87%).

The global transformation program remains on track (gross run rate benefit of ~A$43m to date), expected to be A$75m by end of FY22.

LNK saw strong cash flow generation in the year with FCF of A$139m. This outcome, along with the PEXA returns (A$200m gross), allowed LNK to reduce net debt by 39% (leverage ratio reduced to 1.8x, below guidance range of 2.0x-3.0x) and announce a A$150m on-market share buyback.

The not so good

FY22 guidance is for a broadly flat operating EBIT outcome and low single digit revenue growth. Management flagged reinvestment back into the business (e.g. staff cost normalisation and ongoing investment in data/security and front line operations).

The Banking and Credit Management (BCM) unit continues to be impacted by COVID (operating EBITDA of ~A$6m, -73% on pcp), with a lack of NPL books coming to market due to government stimulus measures. Expectations are for activity to begin picking up in 2HCY22.

Margin income in Corporate Markets continues to be impacted by the low rate environment, falling ~75% (~A$18m) since FY19.

Changes to forecasts

We lower our FY22F/FY23F operating NPATA by 3%-7% reflecting more conservative divisional EBIT margin forecasts. Our price target is lowered (login to view target price) on the above changes. 

We anticipated FY21 as the year of consolidation for LNK (as it rebased its earnings) and despite the flatter earnings trajectory into FY22, we believe there is inherent value at these levels for the patient investor. Add maintained.

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Disclaimer: Analyst may own shares. The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

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