Link Group (ASX: LNK) is expected to list on the ASX in the coming weeks, making it the largest IPO for 2015. The market cap of Link once listed is expected to top $2 billion – even at the lower offer price.
But that doesn't make it the best.
Link Group mainly provides superannuation fund administration software but also provides share registry and other services to companies. The company services over 2,300 clients globally, with 90% of revenues coming from Australia.
According to the prospectus, Link is expected to issue shares priced between $5.41 and $6.37, giving it a prospective P/E ratio of between 25.3x and 28.7x, with an annualised dividend yield of between 2.4% and 2.7%.
That's not a cheap price when you consider the market is trading on a P/E of around 18x. There are other negatives too. Link is being sold by private equity firm Pacific Equity Partners (PEP), and private equity firms don't have a great track record of selling off bargains.
Anyone remember Myer Holdings Ltd's (ASX: MYR) IPO? Shares were offered at $4.10, tumbled immediately and never recovered their IPO price. Myer shares are now trading at 89.5 cents.
Link will be slightly different with PEP holding 30% of the company post-IPO, unlike Myer's private equity sellers.
PEP will voluntarily hold its shares until the release of the 2016 financial year results – less than a year away. Given the pricing, PEP should really be holding its shares for a longer period if it is committed to the successful listing of Link on the ASX.
Additionally, Link is forecasting hockey-stick-like growth in revenues, earnings and net profit for the 2016 financial year. 27% growth in revenues and 22% growth in earnings before interest, tax, depreciation and amortisation (EBITDA), despite much lower growth over the past two years.
In fact, earnings before interest and tax (EBIT) has dropped from $98.2 million in 2013 to $63.5 million in 2014 and even lower to $56.3 million in 2015. Now the company is predicting 74% growth in pro-forma EBIT in 2016.
Sure the company may be able to meet or even exceed that, but those are lofty expectations.
GBST Holdings Limited (ASX: GBT), which also provides fund, capital markets and wealth administration software, is currently trading on a P/E ratio of 21.8x. For the 2016 financial year, GBT is trading on a prospective P/E ratio of 17.5x – much cheaper than Link, and even more importantly, has been listed for 10 years and has a proven track record of earnings and dividend growth.
Australian Ethical portfolio manager Mason Willoughby-Thomas agrees that Link is expensive, telling Fairfax media, "The valuation looks full, leaving little room for error. It requires flawless execution of the company's growth strategy and the ability to successfully deliver synergies associated with the Superpartners acquisition."
And that's the problem with stocks priced for perfection. One tiny slip and the price is likely to fall heavily. Investors may want to give this one a miss and wait for the slip-up.
