Shares in the IT service management powerhouse Link Administration Holdings Limited (ASX: LNK) have continued their resurgence this week to $4.34 at the time of writing. This is a substantial improvement from when this company bottomed out at $2.64 midway through March, in conjunction with the broader S&P/ASX 200 Index (ASX: XJO).
While Link has obviously staged an impressive comeback in recent months, here's a few of the tailwinds I believe are favouring a further rise in its share price moving forward.
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Operations resilient during COVID-19
Many investors would likely be aware of this company due to Link Market Services. This online administrative platform allows shareholders to update their company communications preferences, enable dividend payments or reinvestment plans and, most invaluably at this time of year, assists at tax time!
Although the Link share price may have been hammered due to COVID-19, the majority of Link's operations themselves remain unaffected due to the company's profound online presence.
As Link confirmed in its presentation to the Macquarie Investor Conference last month, more than 80% of its workforce had seamlessly transitioned to working remotely throughout the pandemic. Link reports this transition allowed it to service its clients at a time of high market volatility and regulatory change.
In addition to its operational resilience to COVID-19, Link has benefitted from the tailwind of greater than 80% of its revenues being recurring in nature. This is due to the fact that large financial institutions and other blue-chip companies deeply rely on the administrative services Link provides.
Overall, this sustainable revenue model will likely benefit the company's cash flow in FY20, despite the volatile economic environment. It's a positive sign to shareholders and prospective investors alike that Link's financial performance is highly resilient and performing at optimal levels.
Long-term tailwinds
While Link looks well-situated to meet market expectations in the short-term, I am bullish on the company to grow in the medium to long-term for 2 key reasons.
The first of these is the health pandemic's impact on company general meetings. Section 250N of the Corporations Act (2001) mandates that every public company must hold an AGM at least once in each calendar year.
Although this requirement has been temporarily put on hold by the Australian Securities & Investments Commission, AGMs aren't going anywhere anytime soon. Having said this, after COVID-19, the traditional AGM where hundreds of shareholders congregate may be considered a thing of the past.
Link believes that the virtual AGM is the way of the future. According to the company's Macquarie Investor Conference presentation, they had already confirmed 25 virtual AGMs in May 2020, and are anticipating demand for this service to further increase.
This could become an additional avenue for earnings for Link over the longer term, particularly as their complementary position as an administrative service provider makes them – or competitor Computershare Ltd (ASX: CPU) – the obvious choices for public companies looking to conduct a virtual AGM.
We will have to wait until Link reports its FY20 earnings later this year to see just how many companies are opting for its virtual AGM service, but I think this is a revenue 'freebie' that may not be reflected in the current share price.
Secondly, I see a lot of upside for Link's 44.2% exposure to the PEXA platform in the coming years. The Property Exchange Australia, known as PEXA, is the leading online conveyancing platform that allows users to complete the exchange of property when buying or selling land.
PEXA is the new era of property exchange, with the industry aiming to work towards a 100% online system while leaving behind the archaic use of paper land certificates to signify property ownership.
The platform claims to have already completed over 5.3 million property transactions since its inception, and states such as South Australia have already mandated the use of PEXA from August 2020.
Rumours have also circulated that PEXA may look to conduct an initial public offering in 2021, with reports by the Australian Financial Review estimating the platform to be valued at as much as $2 billion.
Link's maintenance of a sizeable stake in the PEXA network bodes well for the company's future earnings growth over the next couple of years. A confirmed IPO of PEXA would undoubtedly see a dramatic boost to Link's share price, but even without an IPO I think the gradual shift toward property e-conveyancing tremendously benefits Link's investment in the PEXA platform.
Foolish takeaway
Despite all the challenges thrown at it in 2020, Link seems to have positioned itself strongly, with its recurring revenue and capacity to provide companies with niche yet essential administrative services. I also think great opportunities lie in PEXA and virtual AGMs, and this company appears to be in pole position to benefit from these tailwinds.
