Link: Initiating on Administrative Services Provider as It Refocuses on Core Competency

We initiate coverage on Link Administration LNK with a fair value estimate of AUD 1.50 per share and assign the group narrow moat, High Uncertainty, and Standard Capital Allocation Ratings. Link derives its revenue mainly from delivering administration services to corporations and/or financial services companies in Australia and the United Kingdom. The firm is the largest provider of superannuation administration services and the second-largest provider of share registry services in Australia.

We expect Link to refocus on its higher-returning core businesses. Link’s diverse product range and long-term contractual agreements create switching costs for its clients, while business volume growth and its scalable client platform give rise to durable cost advantages. We expect revenue growth from foreign markets, expansion in superannuation members, cross-selling, and higher interest income on client cash balances. However, future margin expansion may be limited by falling customer fees, investment in platform development overseas, and rising competition from local players in foreign markets. Still, Link’s low capital intensity, high proportion of recurring revenue, and ongoing improvements in operational efficiency should ensure a robust balance sheet and steady dividends. So long as Link maintains its current considerable scale over peers, it can keep pricing its services competitively, driving customer retention and new business wins.

Shares are moderately undervalued at current prices. A main investor concern is the potential for further contract losses following Hesta Super’s recent termination. This is Link’s first material contract loss in the last five years. However, we see this as an isolated customer loss. In general, Link has a sticky clientele and continues to win new client contracts, most recently ANZ Staff Super, Ampol, and First Sentier in fiscal 2023.