Why this huge fund manager likes Link Administration Holdings Ltd

Listed investment companies and investment trusts like WAM Capital Limited (ASX: WAM) and Magellan Global Trust (ASX: MGG) release a monthly update with their top holdings.

However, companies with large funds under management like Commonwealth Bank of Australia (ASX: CBA) and Challenger Ltd (ASX: CGF) also regularly update the market with any changes to their substantial holdings.

For example, fund manager Challenger disclosed that on 14 December 2017 it became a substantial holder of Link Administration Holdings Ltd (ASX: LNK) and gained voting power of 5.07% of the shares.

Link is the largest provider of services in Australia’s superannuation fund administration industry. It also provides services for corporate markets, asset services and information, digital & data services.

Most people will have used Link in some way, many ASX businesses use it for their shareholder services and Link has some of the largest superannuation funds as clients such as AustralianSuper, REST, HostPlus, Cbus and HESTA.

However, there is potential for expansion in the superannuation fund space as Link only provides administration services for two of the largest ten funds by fees, the rest are doing it in-house.

Link provides administration services for 17% of the superannuation funds under management but has 34% of the superannuation members. The superannuation sector is growing at a fast pace due to Australia’s mandatory 9.5% contribution of wages for employees.

In FY17 Link grew revenue by 1%, operating earnings before interest, tax, depreciation and amortisation (EBITDA) by 15%, net profit after tax (NPAT) by 17% and operating net profit after tax and amortisation (NPATA) by 21%.

Management are confident of achieving a group operating EBITDA margin of 34% by FY20, which would be a good boost to earnings per share (EPS) growth, without taking into account revenue growth.

Foolish takeaway

Link is currently trading at 38x FY17’s earnings with a grossed-up dividend yield of 2.3%. This seems pretty expensive and I wouldn’t be a buyer today, but Link does appear to have a good long-term future with the growth of the superannuation pool.

I think this stock is a better bet for growth compared to Link.

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Motley Fool contributor Tristan Harrison owns shares of Challenger Limited, MAGLOBTRST UNITS, and WAM Capital Limited. The Motley Fool Australia owns shares of and has recommended Challenger Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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