This week I had the pleasure (not sure if that is the best word) of settling on the sale of our first home. An interesting experience at the best of times, let alone amid the COVID-19 shutdown.
The entire settlement was completed virtually via the PEXA platform and could not have been more seamless. Given the positive experience, it would not surprise me if all settlements are completed online sooner rather than later. So I decided to see who owns PEXA, and it happens to be Link Administration Services, which has become my stock of the week.
LNK has become a monopolistic provider of outsourced administration services for superannuation funds, corporate markets and other services including data management and communication. It is far bigger than the share registry business for which it is best-known.
The company is split across three divisions, being fund administration; corporate markets and information; and digital and data services. Following a series of acquisitions before and after its float, LNK has become the dominant provider of outsourced administration for industry and corporate superannuation funds, holding 30% market share and counting AustralianSuper, REST and Energy Super among its long-term clients.
This defensive business is complemented by the more cyclical corporate market operations, which assist with administering managed funds, shareholder registries and other important market functions. The digital division, where LNK is offering technology-enabled data analytics and digital solutions to traditionally paper-based processes, represents the greatest growth opportunity.
Based on the FY19 dividend of 20.5 cents, LNK at $3.58 currently offers an attractive fully franked dividend yield of 5.7%, or 8.2% grossed-up. LNK’s substantial recurring revenue, estimated at $1.123 billion in 2019 (or 80% of total revenue), is in our view being undervalued by the market due to short-term concerns regarding the impacts of Brexit and more volatile markets on the company’s other divisions.
LNK was among the worst performers during the March quarter, falling more than 50%, with investors seemingly concerned about the company’s debt position following a number of acquisitions in recent years. These concerns appear overstated, something reiterated by management and highlighted by the company’s cash balance of about $125 million and interest cover ratio of 15 times, versus debt repayments of just $20 million.
Interestingly, LNK recently increased its stake in PEXA, the technology-enabled property settlement platform that was previously owned by Australian state governments, to 44%. PEXA has an effective monopoly over the electronic conveyancing and settlement of all properties in Australia, and saw $1.754 billion in transactions processed in 2019, more than 100% up on 2018.
LNK offers investors a unique opportunity to purchase an annuity-like income stream supported by consolidation within the industry fund sector, but with exposure to important growth assets in its technology divisions. Listed companies are placing increasing importance and value on the data they collect and harness, meaning established businesses like LNK have a competitive advantage compared to newer competitors.