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Vivek Kumar

Link Administration Holdings Ltd, an Australia-based provider of services in superannuation administration industry, said it has received a conditional A$2.76 billion proposal from a consortium comprising Pacific Equity Partners, Carlyle Group to acquire 100% of the stake, sending its shares up 27% to A$5.1 on Monday.

The non-binding offer of A$5.20 a share is at a 30.3% premium to the shareholder registry firm’s last closing price and has the support of Perpetual Ltd, which owns 9.7% of the company, Reuters reported.

The Link Group Board will consider the Proposal, including obtaining advice from its financial and legal advisers. Shareholders do not need to take any action in relation to the Proposal. It should be noted that there is no certainty that the discussions with the Consortium will result in any transaction, the company said.

Link Group has appointed Macquarie Capital and UBS as its financial advisers and Herbert Smith Freehills as its legal adviser.

At the time of writing, Link Administration’s shares traded 24.56% higher at A$4.97 on Monday; however, the stock is down over 15% so far this year.

Link Administration stock forecast and Analyst views

The seven analysts offering 12-month price targets for Link Administration Holdings Ltd have a median target of A$4.38, with a high estimate of A$5.10 and a low estimate of A$3.40, according to FT.

Morgan Stanley target price is A$3.55 with a high of A$5.35 under a bull scenario and A$1.5 under the worst-case scenario. Morgan Stanley said DCF weighted 10% bull, 60% base, 30% bear – skew reflects headwinds in Super business, risks of further margin and operational headwinds in Fund Admin, PES not building sufficient scale in the near term. Key assumptions: 11.5% cost of equity, 3% terminal growth.

“The offer values Link Administration (LNK) at 30% premium to last close and implies 24.5x / 19.3x P/E on FY21E / FY22E on our forecasts. The offer is a ~20% discount to LNK’s IPO price of A$6.37 and a ~15% discount to LNK’s ~A$6 share price just prior to the 1H20 result and pre COVID. Perpetual holds ~9.65% of LNK and has stated it intends to vote in favour of the offer of at least A$5.20. We currently value LNK at A$3.40 in our blended price target. In our SOTP valuation, we value LNK’s stake in PEXA at A$1.54 EV per share. Our bull case valuation for LNK is A$5.35. We note LNK has a new CEO assuming the role on November 2, 2020. LNK is also in the process of acquiring the PES loan management business, with that deal under review by the Irish regulator,” said Andrei Stadnik, equity analysts at Morgan Stanley.

“We think the consensus is missing the multi-year headwinds in Super. Valuation looks too high vs peers. Gearing is above the target, though PEXA distribution proceeds could help. Fund admin growth is likely to take longer but retains potential. UK mortgage servicing is slower than the U.S. Asset and non-performing loan servicing remain a longer-term growth option,” Stadnik added.

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Upside and Downside Risks

Upside: 1) Share gain in Super admin market or benefits from fund consolidation. 2) Stronger growth in UK mortgage servicing/EU asset servicing. 3) Earlier or larger than expected PEXA distribution proceeds. – highlighted by Morgan Stanley.

Downside: 1) Major fund admin client contracts not renewed or outsourcing scope is narrowed. 2) Acceleration of Super account consolidation. 3) ERS results in significant account inactivation. 4) Adverse FCA findings re Woodford.

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