The Link Administration Holdings Ltd (ASX:LNK) share price rose 5% to $7.51 after this morning's results announcement revealed growing profit margins. Here's what you need to know:
- Revenue rose 1% to $396 million
- Net Profit After Tax of $42 million, compared to a $4 million loss in prior period
- Operating Earnings Before Interest, Tax, Depreciation and Amortisation (EBITDA) margins widened from 23% to 27%
- Earnings of 11.5 cents per share
- Dividends of 6 cents per share
- Outlook for 'priorities for the remainder of the year will be on delivering the next phase of Group margin improvement'
So What?
A reasonable result for Link Group, although driven primarily by lower costs that were partly due to the retirement of legacy systems. Operating expenses declined $15 million, or 5%, and were responsible for most of the $18 million Operating EBITDA growth that the company reported.
Over the next couple of years, management expects to be able to achieve further significant cost savings due to more legacy system retirements, as well as the removal of duplicated costs once clients are fully migrated to new systems. Link also made a number of small parallel investments during the year.
Now What?
Although it was a respectable result for Link, the company continues to look expensive. If we double half-year profits to approximate the full year, Link is priced at about 32x its full year earnings. That appears quite high to me, for a company that is growing primarily through cost cutting.
Yes, Link has great levels of recurring revenue (92% of all revenue was recurring in this half), and yes it could deliver higher margins over the next couple of years as it migrates clients to new platforms and retires legacy systems. Yet the fund administration business is fairly competitive and there are countless companies moving into the superannuation and wealth management space alongside Link. Link appears to be a good business, but too richly priced for my liking.
