Equity fund manager DNR Capital has added Link Administration Holdings to its portfolio, citing the company’s dominant market position in superannuation administration, and its number two position in the share registry market.
It its latest investor report, DNR says Link 35 per cent share of the Australian superannuation administration market gives it a superior cost position and other scale advantages. DNR says Link is well placed to win market share as more super funds outsource their administration.
“Link has strong and improving margins and return on equity. Incremental return on invested capital is in the mid-30s. Earnings per share growth is expected to be mid-teens for the next few years,” DNR says
DNR’s Australian Equities High Conviction Fund produced a return of 4.41 per cent in October, when the S&P/ASX 200 was up 4.01 per cent. Over the past year the fund has returned 16.63 per cent, compared with the index return of 16.13 per cent.
Looking at Link longer term, DNR says its contracts have inflation escalators, which will act as a hedge in a rising inflation environment.
“Gearing is a little higher than market but given the annuity style earnings, this appears entirely appropriate. Interest cover is very strong and average net debt to EBITDA comfortable,” it says.
Link stock fell in the second half of last year, from a peak of $8.52 a share in July to a low of $6.81 in December. The stock has edged up this year but started to take off strongly in October. It is currently trading between $8.60 and $9 a share.
DNR says “The stock de-rated 20 per cent over the past year, which presented an opportunity. The reason for the de-rate is that revenue growth has been disappointing, with superannuation member account consolidation. We expect the company will turn its attention to winning new business.”
DNR sees upside from three areas:
- Winning share in super administration. Link is the cheapest player in the market, thanks to its scale. We would expect this to translate into market share over time.
- Margin upside. Link acquired Superpartners, which was initially dilutive to margins. We think greater scale will drive better margins.
- Integration in the UK. Capita Asset Services, which Link acquired this year, is the number three player in that market. With Link’s expertise and global capability, it will be in a better position to compete for larger clients. We expect further consolidation in funds administration and share registration.
“The stock is trading at 14 times 2019/20, which appears cheap given the quality of the business, potential upside to earnings and global comparisons'” DNR says.
Looking at the overall market outlook, DNR Chief Investment Officer Jamie Nicol says global growth provides the biggest source of opportunities, with the prospect of higher commodity prices. Companies like Worley Parsons, Qube Holdings, and ALS, which all provide services to the mining sector, will benefit from any pickup in resource-related capital expenditure.
Companies with global business activities, such as Brambles and James Hardie, will also benefit from the strength of the US economy.
DNR is looking at companies that can benefits from developments in the use of data to grow markets, software as a service. It is attracted to funds management businesses that are leveraged to the growing pool of retirement savings.
It has a focus on companies with pricing power, which can perform well in an inflationary environment. And it is looking for exposure to companies that will participate in the increase in infrastructure investment in Australia.