Macquarie Securities has given investment industry service provider Link Group an ‘outperform’ recommendation, with a 12-month price target of $9.20, which is about 18 per cent above its current level of around $7.80.
Link began life as a share registry business and has expended into the provision of superannuation fund administration services. It is the biggest player in that market in Australia.
It also operates in New Zealand and 11 other countries.
Its big move into superannuation administration was in 2014, when it tendered successfully to take over Superpartners, a fund administration business owned by five large superannuation funds that were also its clients.
Link signed service contracts with each of the five funds.
Macquarie’s support for the stock is based on its view that there will be increasing demand for its administration services from small superannuation funds, as they come under pressure to reduce their costs.
“With the Superpartners migration completed and legacy system retirement progressing ahead of schedule, Link now has the opportunity to focus on marketing its offering,” Macquarie says in its review of the company.
“We believe it is inevitable that the level of outsourced activity will increase, given potential savings and regulatory pressure on trustees.”
Macquarie estimates that the average administration fee for industry super fund members whose administration is done in-house is $107 a year, compared with $81 for members whose administration is done by Link. Small super funds that do their own administration charge as much as $250 a year.
Macquarie estimates that average member balances could be boosted by between 12 per cent and 26 per cent over the lifetime of an account by reducing administration costs to the level charged by Link.
“We believe that regulatory pressure to lower fees and improve service will see superannuation funds outsource more services. Link is well positioned to be a net beneficiary from outsourcing over time,” Macquarie says.
Link was listed on the Australian Securities Exchange in October 2015, when it made its initial public offering. Its stock price increased steadily from around $7 at listing to a peak of $8.85 in July the following year.
By the end of 2016 it had fallen back to around $7 a share but has regained its momentum this year and is currently trading in a range between $7.70 and $8.10.
The company reported a net profit of $42.5 million in 2015/16, representing a return on equity of 17.7 per cent.
Macquarie is expecting earnings to grow to $95.3 million and ROE to 20.9 per cent in the current year. And in 2018 it expects earnings to grow to $102 million, with an ROE of 22.3 per cent.
Its outlook for dividends is that yield will increase from one per cent in 2015/16, with no franking, to 2.2 per cent in the current year (unfranked) and 2.7 per cent fully franked in 2018.