Link Administration Holdings (LNK) 1H18 operating NPATA was up 58% on the previous corresponding period and approximately 16% above Bloomberg consensus. The 1H18 dividend of 7 cents per share represented a payout ratio of approximately 46% on NPATA, with LNK typically skewing its dividend to 2H. While the primary driver of the result beat was a stronger than expected contribution from the recently acquired LAS business, we thought LNK's 1H18 performance had more positives than negatives.
The weakness, arguably, remains some softness in underlying top line trends in several businesses, although it's not all bad news in our view.
- The IDDS business result was impressive with total revenue up 11% on the previous corresponding period (pcp) and the EBITDA margin (29%) rising 5% on the pcp due to Superpartners synergies;
- a solid Corporate Markets (CM) result with 9% revenue growth on pcp, including 4% recurring revenue (RR) growth, and a 1% lift to the EBITDA margin (approximately 24%) on pcp;
- LAS produced A$33m of EBITDA in just two months since acquisition, although management cautioned against extrapolating this performance for the full year; and
- 1H18 net operating cashflows (A$147m) were up 65% on the pcp helping to lower LNK's gearing (net debt to EBITDA) to 2.46x versus 2.75x when LAS was acquired. Gearing is now inside management's target range (1.5-2.5x).
The result weakness, in our view, was some softness in elements of the Funds Administration (FA) and CM businesses top-lines. Indeed FA's reported revenue (A$284m) fell 2% on the pcp, while CM's underlying RR was flat on the pcp excluding the Funds Solution (FS) acquisition. However on FA top line growth, we note that if you exclude the Superpartners pricing resets, underlying revenue growth was a more respectable 1.6% on the pcp. On CM, while the FS acquisition did support this half, it should be remembered RR growth has averaged 10% over the last 5 halves driven by client wins.
We have increased our price target (Morgans clients can login to view) to reflect earnings changes and a valuation roll forward. We like the Link story over the next few years, noting its PE multiple will retract quickly as synergies from Superpartners and LAS are obtained. We also believe growth in LNK's core FA business will recover post Superpartners pricing resets.
We maintain our Add recommendation.
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