Link Administration: what’s the outlook following $266m acquisition?

We examine the details behind Link Administration’s Pepper European Servicing (PES) acquisition.

Link Administration share price soars

The Link Administration Holdings Pty Limited share price lagged in the days prior to last week’s $266 million acquisition announcement.

In the wake of it however, the stock soared: climbing 9.66% last Friday, even as the broader market faced (and indeed, continues to face) a vicious sell-off, related primarily to the implied economic impact of the coronavirus.

The Link Administration Holdings (ASX: LNK) share price did however trade lower today, at $6.57 per share – on a market capitalisation of $3.49 billion, at 14:26 (AEDT)

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Details of the acquisition

Centrally, as part of this acquisition, Link Administration will acquire 100% of Pepper European Servicing, for an upfront cash consideration of $266 million.

The deal will be funded from the company’s current cash and debt facilities.

Ultimately, management argues that this move will help expand Link's BCM business and is 'strategically positioned to capture growth in active and emerging markets in the medium term.’

With operations primarily in the UK and Ireland, Pepper European Servicing (PES) is involved in 'end-to-end loan servicing, advisory and asset management across residential and commercial segments.'

Looking at PES's fundamentals, by the close of 2019, the company had ~€39 billion in assets under management, expected revenues of $150 million and normalised earnings (EBITDA) of $32 million.

The deal is regarded as complimentary to Link’s BCM business and is expected to strongly contribute to LNK’s operating earnings per share (EPS).

Examining the implied fundamentals of this acquisition – for the combined BCM & PES entity – on a proforma basis, Link is projecting combined revenues of $318.6 million and operating earnings (EBITDA) of $54.1 million, boosting the earnings margin of the combined BCM-PES entity to 17.0%.

As a standalone business, BCM has an earnings margin of 12.9%.

The analyst take

In response to this acquisition announcement, Macquarie Wealth Management has maintained their ‘Outperform’ rating and reiterated their 12-month price target of $7.70 per share on LNK.

At current price levels that would imply some upside potential.

Though Macquarie continues to like the stock, the investment bank did note that they were a ‘bit surprised to see the share price react to the extent that it did with the market effectively paying for the acquisition and synergies upfront.'

Unsurprisingly as well, the Link share price came off today, falling 3% as global concerns over the coronavirus deepen.

The ASX 200 benchmark was down over 100 points before noon.

Link fundamentals in focus

Though last week’s announcement has seen Link’s share price trade higher (in general), it has ultimately been a difficult year for the company, with its stock trending down ~8% during the last twelve months.

Indeed, in FY19, though the company saw its revenues rise 17%, to $1,403 million (on a PCP basis), the company's operating earnings per share (EPS) fell to 37.9 cents – representing a decline of ~9% on a PCP basis.

The company did however recently announce an ‘on market share buy back of up to 10%’, as well as arguing that though short-term headwinds remain, the medium-term growth outlook remains strong.

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