Share price slump tipped to lure back Link’s suitors
Private equity buyers might be enticed back after share price plummets.
Mentioned: PEXA Group Ltd (PXA)
Link’s share price fell almost 13% after announcing full year results but the stumble could lure back the private equity buyers who were circling the super fund administrator last year, says Morningstar equity strategist Gareth James.
James cut his fair value for narrow-moat Link (ASX: LNK) by 8% to $6.35 after it reported that revenue fell 6% to $1.2 billion last Thursday, below expectations. Adjusted profit was down 18% from the previous year at $113 million, weighed by the closure of dormant superannuation accounts.
The shares closed Tuesday at $4.37, a 31% discount to the Morningstar fair value estimate.
James believes markets overreacted to the news. He says the sell-off could reignite interest from private equity outfits such as Pacific Equity Partners (PEP), Carlyle and SS&C who were bidding as high as $5.65 a share last December.
“What’s happened since those bids? Pexa has been floated at a really good price. So why wouldn’t those bidders come back? Especially now that shareholders may be more open to the deal,” James says.
In December US software provider SS&C Technologies bid $5.65 a share, topping an earlier offer from Carlyle and PEP of $5.40.
At the time, the Link board said the offers did not represent “compelling value” for shareholders.
SS&C’s bid would equate to 29% premium to Tuesday’s closing price.
Management opted to focus on floating property exchange network Pexa (ASX: PXA) which joined the ASX in July. Link owns 44% of Pexa, which has a monopoly on electronic conveyancing for real estate in Australia.
Wide-moat Pexa closed Tuesday at $16.53, a 25% premium to Morningstar fair value.
Pexa going public has potentially removed a barrier for suitors, says James. They now have a concrete valuation and transparent performance data to incorporate into their valuation.
The barrier to any acquisition will be the same as it was previously: the board. Chief executive Vivek Bhatia was only appointed in 2020 and may be hesitant to step aside so quickly, says James.
In a possible signal of his commitment, Link chairman Michael Carapiet bought $556,250 worth of shares last Friday, the day after the company reported, according to a regulatory notice.
Link suits the playbook of private equity firms with its combination of struggling share price and resilient earnings, says James.
“Their plan will be to turn the business around in five years’ time.”
“The cash flows will pay the debt in the meantime and then they refloat it as a more attractive offer.”
Were another bid to surface it would join a string of offers made by private equity groups and superannuation funds for ASX names. Earlier this month Sydney Airport beat back a $17 billion bid from a consortium including several Australian superannuation funds.
Last Monday, the board of Spark Infrastructure (ASX: SKI) unanimously recommended shareholders accept a $10.1 billion offer from a consortium of private equity firm KKR and two Canadian pension funds.
Elsewhere in the results, James is encouraged by the company’s efforts to cut debt and focus the business.
Link retreated from the acquisition of Pepper European Servicing a firm which helps service loans and manage assets in Europe. It has also cut debt down from $750 million to $450 million.
The company announced an on-market buyback of up to $150 million, or around 5% of shares. The buyback will commence on the 17th of September.
Link is betting on consolidation in the super sector
It is not the first time private equity has dabbled in Link. Pacific Equity Partners owned Link prior to its IPO in October 2015.
When Link was floated at $6.37 a share, investors hoped that consolidation in the superannuation sector would benefit low-cost industry funds, says James. That in turn would benefit Link, the lowest cost provider of administration services to the super industry.
Instead, Link was first hit by the government’s push to consolidate super accounts, cutting down the fees it collects. Then, some funds chose to in-house administration.
James says these developments don’t change the fundamental thesis, although it might take longer for it to play out than initially expected.
He points to the government’s latest superannuation reforms, Your Future Your Super, which subject funds to a performance test and blacklist poor performers.
Thirteen funds with over 1-million-member accounts failed the first performance test, according to results released Tuesday. Those funds are now required to notify their members.
James says greater focus on fund performance will reinvigorate the consolidation thesis, to Link’s benefit.
“Six years on from the listing and many investors are tired of the superannuation consolidation story,” he says.
“But I think private equity firms will look at it and say it’s still going to happen, but it will take ten instead of five years.”