Category: Global stocks

Global Stock refer to share that are traded on multiple exchanges with different currencies. For example, if a publicly-traded company issues shares in dollars on the New York Stock Exchange and in pounds on the London Stock Exchange, it is issuing global registered shares. Global stock to a portfolio offers diversification and may provide higher returns. Global stock markets may experience higher levels of volatility than other domestic markets with bigger swings to both the upside and downside.

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Global stocks

Healthy demand for value stock funds, tepid demand for bonds as the reflation trade kicks in

× Index funds continue to increase their market share at the expense of actively managed funds because of higher inflows (size adjusted).

× Global large-cap blend, US large-cap value, ecology, and financial equity funds saw the highest inflows on a Morningstar Category level in March.

× Corporate bond and US growth equity funds were highly unloved, as were multistrategy products.

× BlackRock topped the list of the asset-gatherers by branding name in the active spectrum; Xtrackers in the passive world.

× Allianz Income and Growth benefited the most among Europe’s largest open-end funds from the demand for risky assets. Conversely, the largest trackers of the S&P 500, IShares Core S&P 500 and Vanguard S&P 500 ETF, continued to bleed.

Long-term fund investors in Europe increasingly fell into line with the dominant global market trend in March as the reflation trade kicked in. This was reflected by a virtual standstill in the net sale data for bond funds, which only took in net EUR 1.2 billion, thus making last March the weakest month in 12 months. This reflects the heavy losses multiple bond segments have suffered over the past months as yields for government bonds rose sharply in the first quarter. The rising optimism of investors for the prospects of a post-coronavirus economy is also reflected in the high inflows of 47.3 EUR billion sent to equity funds. Cyclical sectors and value categories benefited the most from this trend. Conversely, precious-metals funds suffered a rout in March, shedding EUR 1.9 billion, another indication that gold has lost its allure in the current market environment. These outflows were only partly offset by inflows to broad basket and industrial commodity funds, and thus net sales for commodity funds were pushed into negative terrain in March.

Allocation funds enjoyed the highest one-month inflows since February 2018, while alternative funds returned to the red zone, suffering outflows of EUR 400 million after a two-month positive-flow intermezzo. In all, long-term funds garnered healthy inflows of EUR 60.2 billion. Money market funds saw modest outflows of EUR 430 million. Assets in long-term funds domiciled in Europe rose to EUR 10,952 billion from EUR 10,608 billion as of Feb. 28, 2021. This marked a new historic record for Europe’s fund industry.

Active Versus Passive

Long-term index funds posted inflows of EUR 16.9 billion in March versus EUR 43.3 billion that targeted actively managed funds. (The table below only includes data for the main broad category groups.) On the active side, equity funds enjoyed the highest demand, pulling in EUR 29.5 billion, while demand for actively managed fixed-income funds trickled down to EUR 493 million. Equity index funds enjoyed inflows of EUR 17.8 billion, and bond index funds drew in close to EUR 800 million. The market of long-term index funds rose to 20.9% as of March 2021 from 19.5% as of March 31, 2020. When including money market funds, which are the domain of active managers, the market share of index funds stood at 18.5%, up from 16.9% as of March 31, 2020.

Fund Categories: The Leaders

A look at the top-selling long-term fund categories reveals the continued strong demand for global equities. Global large-cap blend equity funds enjoyed an outstanding EUR 11.9 billion of net inflows last month, marking its 10th consecutive month of positive inflows. Passive and active funds shared the spoils, even though the two top sellers within the category were two index funds: HSBC Developed World Sustainable Equity Index Fund and BlackRock ACS World ESG Equity Tracker Fund, with almost EUR 2.0 billion and EUR 1.7 billion, respectively (both are distributed in the United Kingdom only).

US large-cap value equity funds took in EUR 4.8 billion in March, making its best month with regard to flows on record. This arguably indicates that value investors, after a decade in the wilderness, anticipate the so-called “great rotation”: a major turn in the investment cycle from growth to value stocks. The iShares Edge MSCI USA Value Factor UCITS ETF was the most sought-after product of the category, with EUR 1.5 billion attracted.

The equity sector ecology category continued to benefit from the huge demand for environmental, social, and governance and climate-focused funds, garnering inflows of EUR 4.0 billion. ACS Climate Transition World Equity Fund was the fund with the highest demand, with net inflows of EUR 524 million each.

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Global stocks

Magellan Financial Group Ltd

While we don’t believe it will be immune from the structural trend of investors moving to passive investments, ongoing competition among fund managers and major institutions in-housing their asset management, we think it’s better placed than most active managers to address these headwinds. Magellan is moving beyond passively managing money, to implementing new initiatives such as product expansion to attract new money. There are prospects of stronger inflows, notably from Australia’s self-managed superannuation funds, the ageing demographic, and fee-conscious investors who were previously discouraged from investing with Magellan. However, continued strong performance will remain key.

  • Magellan has built a high-profile brand that it can effectively leverage to attract/retain client funds.
  • The firm is well placed to serve growing retail investor demand and win institutional mandates. In Australia, increasing superannuation balances supported by the ageing demographic and compulsory superannuation should expand demand for its products. Meanwhile, its established presence in the much larger U.S. and U. K. markets provides further growth opportunities.
  • A strong balance sheet, operating leverage, low capital demands, and strong free cash flow generation supports a high dividend payout ratio.

Magellan has unveiled FuturePay, its long awaited new fund catering to retirees seeking predictable income. Foreshadowed since fiscal 2019, we expect FuturePay to gain share from standard equity income funds and be used alongside annuities. Unlike the glut of equity funds that pay a percentage-based distribution from buying high-yield stocks, FuturePay feeds into Magellan’s Global Equities and Infrastructure strategies, and targets a fixed distribution per unit that’s indexed to inflation. Distributions are currently AUD 0.0203 per unit per month, equating to an annual yield of 4.3%.

Nonetheless, our fair value estimate retreats to AUD 56.50 per share from AUD 57.50, though shares remain undervalued. The earnings we forecast from FuturePay were offset mainly by higher expected future tax rates, and FuturePay cannibalising some flows into Magellan’s core, higher-margin funds. On the former, we note Magellan is an offshore banking unit, or OBU, enjoying low tax rates– currently 22.2%. The government’s proposed removal of the OBU regime will likely see it pay taxes closer to the corporate tax rate of 30% starting fiscal 2024.

FuturePay is the latest endeavour by Magellan to exploit underserved niches–here the retirement income market– which plays to its brand strength. We forecast FuturePay to capture 1% of the funds moving from the super to pension phase over the next five years–backed by Magellan’s established distribution reach, and reputation among investors, advisers and research houses. This is 75% less than what we project for annuity provider Challenger.

The proposition to investors is certainty in income stream. For advisers, this alleviates the hard work in ensuring a client has sufficient liquidity, especially in falling markets, which may compensate for having to go through more stringent best interest duty hurdles. For FuturePay, it does not have to pay out as much in distributions in rising markets, and can better top up its support trust. The support trust serves as a piggybank to support Future Pay’s monthly income payments in falling markets. FuturePay can also borrow funds from Magellan to meet its income payment obligations.

FuturePay will dampen Challenger’s annuity sales, or qualify as a retirement income product though. There will always be a need for assets with defensive asset allocation, such as annuities, that mitigate longevity risks. FuturePay does not guarantee income or capital, nor does it maximise social security benefits. Entry and exit fees, forgone contributions into the support trust, and the lack of ratings / platform presence are likely to limit its adoption in the near-term. Though, this will likely unravel in time as Magellan ramps up its distribution and advisers get more accustomed to the product.

Magellan’s recent growth initiatives–including FuturePay, which will see it deploy AUD 50 million into Future Pay’s support trust–suggest it is becoming more capitalintensive, with returns on capital forecast to average 57% over the next five years, versus 71% historically. Regardless, this is sensible capital allocation to defend and reinforce its competitive position.

Bulls Say

  • Magellan has built a strong intangible brand, supported by strong performance, which it can leverage to hold on to client funds, attract new money and charge premium fees.
  • Due to structural market trends and product expansion initiatives, the prospects for organic FUM growth is strong, notably from investors seeking to diversify exposure to international equities or gain a steady retirement income stream.
  • Aside domestic tailwinds from superannuation, Magellan’s distribution relationships in the much larger offshore markets of the U.K. and the U.S. should support growth.

Bears Say

  • The majority of Magellan’s earnings come from a few large funds, meaning it has a high reliance on key investment personnel and the performance of its main funds. Should key people leave, or its main funds underperform for a sustained period, outflows could be material.
  • There is increasing competition from other active international equity managers and new international equity funds from incumbents.
  • The firm faces fee pressure from the increasing popularity of lower-cost alternatives, such as index type products and ETFs.

Source:Morningstar

Disclaimer

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Global stocks Shares

Magellan Financial Group – rand to Attract More Funds

While we don’t believe it will be immune from the structural trends of investors moving to passive investments, continuing fierce competition in the active manager industry and major institutions in-housing some of their asset management, we believe it’s better placed than most active managers to address these headwinds. We also think it’s well position to take advantage from Australia’s growing pool of self-managed superannuation funds that still have a relatively low allocation to global equities. However, continued strong Performance will remain key.

Key Considerations

  • Magellan Financial Group has a high-profile brand. Increasing superannuation balances supported by Australia’s ageing demographic and compulsory superannuation should expand demand for global exposure, and we believe Magellan is well placed to serve growing retail investor demand.
  • Its established presence in the much larger U.S. and U. K. markets gives Magellan further growth opportunities.
  • A strong balance sheet, operating leverage, low capital demands, and strong free cash flow generation supports a high dividend payout ratio and offers investors the best of both growth and income return.
  • A strong long-term track record in international equities allows Magellan to charge investors a premium management fee and has established the firm as a leader in Australia’s wealth-management industry. Continued strong investment performance of flagship funds should support funds flow.
  • Magellan is well managed and benefits from strong long-term growth prospects resulting from increasing numbers of investors seeking to diversify exposure to international equities with a long-term, high-quality stock focus.
  • Magellan’s distribution relationships in the much larger offshore markets of the U.K. and the U.S. give it a stronger growth profile than most domestic peers.
  • The majority of Magellan’s earnings come from a few large funds, meaning it has a high reliance on key investment personnel and the performance of its main funds. Should these personnel leave, or should its main funds underperform for a sustained period, fund outflow could increase to material levels.
  • There is increasing competition from other active international equity managers and new international equity funds from incumbents.
  • The firm faces fee pressure from the increasing popularity of lower-cost alternatives, such as index type products and ETFs.

 (Source: Morningstar)

Disclaimer

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Global stocks

Medibank Private Ltd

We now assume Medibank can grow policyholders around 3% per year out to fiscal 2025, compared with around 2% previously. With the market estimated to grow at 1% per year, this reflects our expectation that Medibank’s market share edges up to 30% by fiscal 2025 from an estimated 27.2% currently

In the first nine months of fiscal 2021, industry policyholders have grown around 2.5%, or by 166,000, to 6.9 million. In other words, around 18,500 new policyholders a month. Medibank has averaged policyholder growth of around 6,100 per month over the first 10 months of fiscal 2021. This implies Medibank is winning 33% of new policyholders, higher than its existing share of the market. We have increased our fiscal 2021 policyholder forecasts to 4% from 3%, this is in line with Medibank fiscal 2021 guidance to grow policyholder numbers by 3.5% to 4%. Our fiscal 2021 dividend is at the top end of management’s 75%-85% target range.

Medibank being a large and more profitable insurer is able to spend more on marketing and has greater brand awareness than many competitors, hence is more likely to attract new to industry joiners. We also believe Medibank’s advertising of in-home care resonated with the public, especially at a time where aversion to hospital stays increased. Reducing the number of days a patient spends in hospital should prove to be cheaper for the insurer, meaning a slight benefit to average claims paid per policyholder. Medibank also has in-house healthcare and telehealth services, which we believe support better customer outcomes. These factors, along with Medibank benefitting from scale benefits in hospital contracting and claims integrity, provide the insurer sustainable competitive advantages, which underpin our narrow moat rating.

Profile

Medibank is the largest health insurer in Australia. Its two brands, Medibank Private and ahm, cover over 4.7 million people. Medibank and Australia’s fourth-largest health fund NIB Holdings are the only listed health insurers. In addition to private health insurance, the firm provides life, pet, and travel insurance, as well as health insurance for overseas students and temporary overseas workers. The Medibank Health division provides healthcare services to businesses, governments, and communities across Australia and New Zealand.

Source:Morningstar

Disclaimer

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Global stocks Shares

AusNet Services Ltd

Revenue is highly secure and predictable between regulatory resets, being close to 90% regulated. Less-favourable regulatory conditions pose headwinds to earnings and distributions.

  • The tougher regulatory environment is a headwind. Earnings are expected to remain subdued in coming years following less generous regulatory resets, though a cost efficiency program should help.
  • The soft economy and high energy utility bills are pressuring the regulator to cut network returns to protect households as much as possible. The environment is likely to remain tough for the foreseeable future.
  • Financial position and distribution policy are relatively conservative, positioning the company well to withstand the tough environment.

AusNet Services owns three regulated energy networks in Victoria: the state’s main high-voltage electricity transmission network; an electricity distribution network; and a gas distribution network. It also owns minor unregulated assets and a third-party asset management business. We like the secure cash flow, solid balance sheet, and full ownership of underlying assets. However, medium-term earnings face major headwinds as the regulator cuts returns to protect households and businesses from high and growing energy bills. AusNet is considered to have no moat, as sustainable excess returns are unlikely, given regular resets and the tough regulatory environment.

Around 85% of AusNet’s revenue is regulated, offering predictable and secure cash flow between regulatory resets. These assets are subject to review by the Australian Energy Regulator, usually every five years. The regulator sets tariffs to provide a fair return for investors after covering forecast costs. AusNet received favourable regulatory decisions for its electricity transmission and distribution assets in past years, including the Advanced Metering Infrastructure program. However, more recent regulatory decisions were relatively unfavorable. We expect future resets will be even tougher, given the soft economy and high energy bills, a key risk for all regulated utilities. Household gas and electricity bills have doubled in the past 10 years because of higher fuel prices, expensive network modernization and government policies to promote green energy.

Long-term government bond yields are a key determinant of regulatory returns, affecting both the cost of debt and the cost of equity allowances. As bond yields have fallen sharply in recent years, regulatory returns have fallen in sympathy. Additionally, rules were changed to give the regulator more power in reducing allowances for other costs. Staggered resets smooth the impact, but all assets will likely generate lower returns in coming years. The electricity distribution network resets in early 2021, the electricity transmission network resets in early 2022, and the gas distribution network resets in early 2023.

Source:Morningstar

Disclaimer

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Global stocks Shares

Harvey Norman Holdings Ltd– Overestimating Upside

Yet, these factors are unlikely to alter the long-term outlook for most retailers. Rather, we expect consumer spending growth will prove relatively weak, while shifts between categories and sales channels could test retailers in the medium term.

The S&P/ASX 200 Consumer Discretionary index has rebounded by some 75% since the recent lows on March 23, 2020, after it collapsed by 45% in just over a month amidst the global equity rout. The discretionary retailing sector was initially much more severely hit than the overall market. In the past, discretionary spending has proven to be procyclical and it was singled out as highly exposed to the impending recession and widespread shutdowns, with these risks further exaggerated by supply chain concerns.

However, unlike the overall domestic equities market, the S&P/ASX 200 Consumer Discretionary index has nearly fully recovered and is just 3% shy of its February 2020 highs. In contrast, the broader Australian market is still down 13% versus its all-time February highs. While our discretionary retailing coverage screened as materially undervalued in March 2020, when we identified Myer, Super Retail and Premier as 5-star investment opportunities, the pendulum has now swung too far the other way.

However, this growth was unevenly distributed because of various restrictions on mobility and gatherings introduced either by federal and state governments or self-imposed by health-conscious consumers. The travel and restaurant industries, as well as fashion retailers, have been amongst the most impacted as consumers redirected their spending to other categories. Clear winners have been liquor, hardware and consumer electronics and home appliances retailers

 (Source: Morningstar)

Disclaimer

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Global stocks

Insurance Australia Group – Unexpectedly Large Provision

There is continual pressure from competition on revenue and margins, with premium rate increases generally only covering recent claims inflation. Large insured events occur without warning, and claims trends are largely beyond management’s control in the short term. Reinsurance protection and quota share agreements do help mitigate risks but come at a cost and mean profit sharing. In addition to more-stable fee-based income, quota share deals have the added benefit of releasing capital. We agree with management’s decision to exit Asia with a focus on profitability in its core markets.

Key Investment Consideration

  • Insurance Australia Group, or IAG, is a custodian of well-known brands in Australia and New Zealand. Despite its size and market share, competitors with low-cost digital strategies, or a focus on select regions or products, prevent IAG from exerting pricing power one would expect with its associated scale.
  • The strategic relationship with Berkshire Hathaway reduces uncertainty and IAG shareholders should benefit with less volatile earnings and dividends.
  • Brand recognition and confidence claims will be paid are helpful in acquiring and retaining customers, but competitors have shown these are not insurmountable barriers.
  • Insurance Australia Group is a general insurer with around AUD 12 billion of annual gross written premiums, operating in Australia and New Zealand. Stakes in a Malaysian and Vietnamese insurer are the only remaining remnants of an abandoned Asia growth strategy. Insurance Australia Group is a custodian of well-known heritage brands which include NRMA, CGU, SGIO, SGIC, Swann Insurance in Australia and State, NZI, AMI, Lumley in New Zealand.
  • The firm’s underwriting discipline, productivity initiatives, and focus on profitable growth, will see returns consistently return its cost of capital.
  • IAG has collectively removed downside risk from 32.5% of its business while retaining exposure to earnings upside via profit share arrangements.
  • A benign claims environment with a lower incidence of major catastrophes considerably boost underwriting profits.
  • A strong balance sheet and good earnings momentum will see consistent dividend growth and surplus capital returned to shareholders.
  • Competition increases and wins market share from incumbents, such as IAG, by offering lower premiums, regardless of the impact on short-term profits and returns.
  • The Asian growth strategy was disappointing, and we endorse the recent sale of operations in Thailand, Indonesia, and India.
  • A higher incidence of large claims events from major catastrophes will reduce profitability to the extent dividends are cut materially and the insurer needs to raise capital.

 (Source: Morningstar)

Disclaimer

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Global stocks Shares

InvoCare Ltd– Earnings

The number of deaths is highly predictable, creating a reliable revenue source. Historically, growth has been driven by price increases, growth in the number of deaths, small organic market share gains, and a boost from acquisitions of small private businesses at relatively low prices. Nonetheless, year-on-year variations in the death rate can cause some short-term earnings volatility. InvoCare typically trades on a high forward price/earnings ratio; however, we believe a premium valuation is justified, given the stable, growing revenue and returns consistently above its cost of capital.

Key Investment Considerations

  • InvoCare usually trades at a high price/earnings ratio, reflecting defensive earnings, strong cash flow generation, and a high dividend payout ratio.
  • Fluctuations in the number of deaths per year and changing product mix dynamics can result in volatility of underlying earnings.
  • The increased reinvestment in the business should support margin improvement while ensuring the business is well placed to capitalise on rising death rates.
  • InvoCare is the largest provider of funeral, cemetery, and crematorium services in Australia, New Zealand, and Singapore. It has a number of well-known, highly respected brands and significant market shares that underpin our
  • wide economic moat rating. InvoCare has a history of resilient and rising revenue and earnings, free cash flow and dividend-per-share growth. The company consistently generates returns above its cost of capital.
  • Steady growth in the number of deaths underpins our positive long-term view on InvoCare’s earnings outlook. Growth in the number of deaths has averaged about 1% in Australia and in New Zealand over the past 60 years. The latest estimates from the Australian Bureau of Statistics and Statistics New Zealand project the annual growth in the number of deaths to increase progressively and peak at around 2.8% in Australia and 2.3% in New Zealand by 2034, before slowing back to around 1% by 2055.
  • InvoCare consistently generates return on invested capital above its weighted average cost of capital, reflective of its market position, reputation, and strong brand equity.
  • Steadily growing industry volumes are relatively immune to economic factors and will accelerate as the population increases.
  • InvoCare faces no significant national competitors in Australia. This relative market strength and InvoCare’s participation in the slow consolidation of the industry should deliver high-quality earnings.
  • Beyond brand management, reputation risk in particular is high, given the importance of personal recommendations to winning new business.
  • Advances in medicine and changes to assumptions for life expectancy, coupled with changes in assumptions regarding birth and death rates, could negatively affect expected cash flows.
  • An extended economic downturn could see more price-sensitive customers spend less on funerals.

 (Source: Morningstar)

Disclaimer

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Categories
Global stocks

Vocus Group Ltd

M2, on the other hand, is an infrastructure-lite but sales force-heavy consumer-focused telecom entity. Its stellar growth has also been driven by many acquisitions.

The February 2016 merger between these companies transformed the enlarged Vocus into a full-service, vertically integrated player with the necessary ammunition to materially lift its share in all segments of the Australian and New Zealand telecommunications markets. However, the group has been beset by integration and execution risks, leading to a string of board and management changes. Under new management, the turnaround is now progressing solidly.

  • Vocus’ extensive fibre network infrastructure has the potential to materially lift the company’s share of the corporate and small business telecommunications markets.
  • Vocus’ Australian retail unit faces margin pressure in the National Broadband Network, or NBN, era.
  • Vocus is well and truly past the “fix and repair” stage, and is on the “shed and grow” phase of its journey, with network services clearly identified as its core unit longer term.

Vocus’ Scheme of Arrangement with MIRA/Aware Super Consortium

We recommend shareholders of Vocus vote in favour of the proposed scheme of arrangement with Voyage, a vehicle owned 50/50 by Macquarie Infrastructure and Real Assets Holdings, or MIRA, and Aware Super. The recommendation is based on the following reasons. First, there have not been any competing interests for Vocus since MIRA’s AUD 5.50 offer was first proposed on Feb. 8, 2021. No left-field utility companies have come along with visions of “bundled plays”, and no right-field upstarts have come along with “funny paper” hoping to turn it into hard assets (as is occurring in other sectors).

In fact, the Vocus board is fully on board with the scheme, at least 15.6% of the voting interests are in the bag (Janchor with 9.3%, MIRA/Aware Super with 6.3%), and we do not see any reasons for other major institutional shareholders to dissent. Second, as pointed out in our prior research, MIRA/Aware Super’s AUD 5.50 per share offer is generous. It is at a significant premium to our AUD 3.50 stand-alone assessment for Vocus, and represents a ritzy 12.7 times underlying EBITDA for the past 12 months, or 11.6 our forecast fiscal 2021 EBITDA. The independent expert’s report, unsurprisingly, also agrees, declaring the offer to be within its AUD 4.98 and AUD 5.60 valuation range. Third, Vocus shareholders should cherish the straightforward, uncomplicated nature of the high-premium bid.

It is AUD 5.50 per share in cold, hard cash right now, as opposed to remaining as shareholders of a listed entity competing in the turbulent and NBN-infested waters of the telecom industry, with no certainty as to when or if Vocus’ value may ever exceed AUD 5.50 in the future.

Bulls Say

  • Vocus owns and operates an extensive fibre network that drives attractive economics in its fibre and Ethernet business and provides a durable competitive advantage.
  • The marriage of Vocus’ infrastructure and M2’s strong sales force has the potential to materially lift the company’s share of both the corporate and the small business markets.
  • Vocus’ presence in the New Zealand telecommunications market is underappreciated by investors and is a fertile source of growth.

Bears Say

  • The merger with M2 has exposed Vocus to the margin dilutive NBN regime.
  • While steps are being taken to improve in these areas, it is abundantly clear Vocus has bitten off more than it can chew with its recent spate of mergers and acquisitions, with reporting and technology systems woefully inadequate for what is a major player in the telecom big leagues.

Source:Morningstar

Disclaimer

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Categories
Global stocks Small Cap

Link Administration Holdings Ltd

The acquisition of U.K.-based Capita Asset Services in 2017 reduced the proportion of revenue from Link’s Australian businesses to around 60% of group revenue. We expect the key earnings driver for both the U.K. and Australian businesses to be cost reductions over the next three years, underpinning an EPS CAGR over the next decade of around 10%.

  • Link benefits from high customer switching costs and relatively low marginal costs, which underpin its narrow economic moat rating. The capital-light business model should enable returns on invested capital to comfortably exceed the weighted average cost of capital.
  • We forecast EPS to grow at a CAGR of 10% over the next decade, driven by revenue growth and margin expansion from acquisition-related synergies.
  • Questions remain around earnings growth drivers beyond planned cost cuts. Link may use acquisitions to drive earnings growth, but this strategy has associated risks.

Link Administration has created a narrow economic moat in the Australian and U.K. financial services administration sectors via its leading positions in fund administration and share registry services. Client retention rates exceed 90% in both markets, underpinned by inflation-linked contracts of between two and five years. The capital-light nature of the business model should enable good cash conversion, regular dividends, and relatively low gearing. Earnings growth prospects are supported by organic growth in member numbers, industry fund consolidation, and continued outsourcing trends.

The company was formed via numerous acquisitions made since 2005 under the ownership of private equity firm Pacific Equity Partners, banks and AMP, which have a reasonably low probability of outsourcing. The remaining 30% comprises a combination of government-owned entities and relatively small superannuation funds, which are likely to have outsourcing lead times of months or years.

Bulls Say

  • We expect Link’s EPS to grow at a CAGR of 10% over the next decade, driven by a revenue CAGR of 5% per year, in addition to cost-cutting and operating leverage.
  • Our base case assumes Link’s Australian fund administration market share grows by 2.5 percentage points to 32.5% over the next five years.
  • The capital-light nature of the business model should enable regular dividends, and low financial leverage creates the opportunity for debt-funded acquisitions.

Bears Say

  • Both superannuation fund administration and share registry services are reasonably commoditized, and sizable competitors exist in both segments.
  • Link’s core businesses may struggle to grow meaningfully beyond low- to mid-single-digit growth rates.
  • Superannuation fund administration and registry services have become more efficient as a result of increasing use of software and automation of processes. However, this raises the prospect of disruption by new software-based solutions.

Source:Morningstar

Disclaimer

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.