Link Administration's (LNK) FY17 operating NPATA of approximately A$124m came in about 5% above Bloomberg consensus (A$117m), but the beat was largely driven by a lower acquired amortisation charge. At the EBITDA (A$219m) and revenue (A$780m) levels the result was more in-line. The 2H17 dividend of 8cps was below consensus (11cps), but this was a result of the new shares issued in the recent equity raising (which were eligible for this dividend).
The FY17 payout ratio (60% of NPATA) was at the top of management's target range.
The positive result was the strong 2H17 results in the Corporate Markets (CM) and Information, Digital & Data Services (IDDS) divisions. These businesses saw approximately 3-4% improvements in EBITDA margins in 2H17 on 1H17. The improved performance in the CM EBITDA margin, driven by cost out, was particularly encouraging given a 10% decline in CM EBITDA margins since FY14.
Both businesses also saw some encouraging revenue trends. While FY17 CM revenue was flat on the previous corresponding period (pcp), this largely reflected soft capital markets activity (-A$14m impact) with recurring revenues up approximately 8% on the pcp on contract wins. IDDS 2H17 revenues rose 12.6% on the pcp (FY17: -4%) driven by growing external revenues.
The 2H17 Funds Administration (FA) result was impacted by a 2% decline in revenue on the pcp, leading to a 2% fall in the 2H17 EBITDA margin (approximately 20%) on 1H17 (approximately 22%). While management indicated FY17 member growth was 0.9%, revenue was impacted by factors including the rebasing of Superpartners contract pricing, the Tasplan client loss and some insourcing of activity. We expect FA revenue will remain under pressure through FY18 with the final -A$19m impact from the Superpartners pricing resets and some hit from the Kinetic client loss.
More positively LNK noted three large FA contract tenders over the next 18 months from which it thinks it could win new clients.
We downgrade FY18F EPS by 4%, but lift FY19F/FY20F EPS by approximated 10% as we incorporate the Capita Asset Services (CAS) acquisition and associated capital raising into our numbers.
We like the LNK story and see value emerging into FY19 on benefits from the CAS acquisition and further Superpartners synergies. We increase our share price target and upgrade our recommendation from Hold to Add.
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