EUR 850.00 For Business Accounts Only

Morningstar | Link Shrewdly Sells CPCS for AUD 436 million. FVE Increased to AUD 8.90.

We have increased our fair value estimate for narrow-moat-rated Link Administration by 5% to AUD 8.90 per share following the sale of its Corporate and Private Clients, or CPCS, business in the United Kingdom for GBP 240 million, or AUD 436 million. The bulk of the fair value increase relates to the time value of money impact on our financial model, with the remainder due to CPCS being sold at a price which exceeds our valuation. At the current market price of AUD 7.26, we continue to believe Link shares are significantly undervalued as the market is overly concerned about regulatory uncertainty within the Australian financial services sector, the potential implications of Brexit, and the integration of Link Asset Services, or LAS. Although the CPCS sale will dilute EPS by around 5% in fiscal 2021, we expect the associated reduction in debt and investment risk to act as a catalyst for an improvement in investor sentiment.

The CPCS business comprises around one fourth of LAS, which was acquired for GBP 888 million in late 2017, implying CPCS cost around GBP 222 million. The GBP 240 million sale price implies an 8% gain on cost, but Link should also benefit from foreign exchange movements, which we estimate will lift the total gain to 16% or AUD 61 million. In addition, Link will retain ownership of the CPCS company secretarial business, which comprises around 5% of CPCS. As the sale is not expected to complete until September 2019, our fiscal 2019 earnings forecasts are unchanged but fiscal 2020 and 2021 have been reduced. The AUD 61 million gain will boost the fiscal 2020 statutory NPAT but is excluded from our underlying NPAT forecast.

Although the CPCS post-tax sale proceeds, of around AUD 400 million, roughly match the AUD 390 million cost of the recent additional investment in PEXA, we don’t believe the PEXA acquisition forced the sale of CPCS. Link instigated a sale process for CPCS following interest from better positioned industry players and the business was sold because it had relatively little overlap with Link’s other businesses. The CPCS sale proceeds will be used to maintain financial leverage following the PEXA acquisition towards the bottom of Link’s target pro-forma net debt to operating EBITDA ratio of 1.5 to 2.5 times. However, redeployment to fund unidentified future acquisitions is possible.

Although we did not expect CPCS to be sold, we are impressed by the enterprise value/EBITDA multiple of 12 times considering the current Brexit related uncertainty in the United Kingdom. Link provided no update to LAS cost synergy guidance and we have not changed our forecasts in this regard. Although it’s possible guidance will be changed at the interim result this month, we expect the potential impact to be immaterial to our fair value. Our revised earnings forecasts imply a fiscal 2020 price/earnings ratio of 16, based on the share price, versus 19 at our fair value. The share price implies a fiscal 2020 dividend yield of 3.9%, or 5.5% with franking, versus 3.1%, or 4.5% with franking, at our fair value.