In a research note released this week, Morningstar analyst Gareth James said he believes the market overreacted to a number of potential setbacks for the group, including proposed federal government changes to superannuation rules back in May 2018.
Link’s share price took another hit a year later when it posted a trading update on 31 May forecasting lower profits for the year to 30 June 2019. The company noted political uncertainty in the UK and regulatory changes in the Australian superannuation sector as two primary factors impacting its earnings outlook.
Morningstar believes the consequent sell-off and 28 per cent, single-day share price decline were also an overreaction by the market. The stock is currently trading at $5.98, down significantly from the $7.70 Link shares that were trading prior to the May 2019 trading update.
“We maintain our $8.10 fair value estimate,” Mr James said. “We have been encouraged by the renewal of superannuation administration contracts with large industry super funds in recent months, which will help maintain Link’s cost advantage in superannuation administration in Australia.”
“Also, the royal commission into financial services sector has resulted in strong growth for industry super funds as investors leave relatively high fee and poorly performing retail funds, in part due to the divestment of financial planning networks by the big four banks, a trend which should also benefit Link.”
Following the acquisition of UK-based Capita Asset Services (CAS) in 2017, offshore revenue now accounts for 40 per cent of Link’s business. Mr James noted that investors have been concerned about embattled UK-based fund manager Woodford Investment Management, to which it provides administration services.
“Woodford was a top-performing manager until issues with one of its funds were discovered by the Financial Conduct Authority (FCA) in 2018, which results in an ongoing investigation and widespread criticism of both Woodford and Link,” Mr James said.
“However, we’ve always thought the market and the media overreacted to the Woodford issue, which is unlikely to have a significant impact on Link.
“We expect Link’s recent share price strength is [partly] due to a reduction in investor concerns about Woodford, as the sensational media headlines have dissipated.”
