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Better buy: Link Administration Holdings Ltd or ASX Ltd?

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Link Administration Holdings Ltd (ASX: LNK) is a provider of fund administration and market data analytics services, with a particular focus on the superannuation fund industry in Australia. Both it and ASX Ltd (ASX: ASX), the operator of Australia’s primary stock exchange, benefit from increased investor confidence in Australian equity markets to drive their business. But which company is a better buy right now?

Link Group brought in total revenues of $503.3 million for the six months ended 31 December 2017, which represented a 27% increase on the prior comparative period. NPAT was up 54% to $63.9 million.

The main driver for the big increase in revenues was the Group’s acquisition of Link Asset Services in November 2017 for a little over $1.5 billion. This new operating segment, which brought in $105.5 million in revenues for the period, will provide a suite of financial and fund administration services to clients in the UK and Europe, giving the company a significantly broader global reach and making it less reliant on its clients in the Australian superannuation industry.

But this expansion has come at a pretty significant cost. Although Link partially funded the acquisition of its new Asset Services business through a retail and institutional equity capital raising of $883.2, the remainder of the price tag was financed through a new £485 million debt facility.

The Group’s total borrowings were a little over $1 billion at 31 December 2017, up from $313.1 million at 30 June 2017. The costs of servicing a debt of this size will put significant downward pressure on the company’s bottom line, and despite the promise of significant revenues from this new segment it still remains to be seen whether Link can actually grow this business over the longer term.

Organic revenue growth from the company’s other operating segments was a more subdued 3% over the prior comparative period. The Corporate Markets segment grew its revenues by 11% to $116.6 million, while revenues from Information, Digital and Data Services increased by 8% to $103.5 million. These increases were offset by a slight decrease in the Group’s largest operating segment, Fund Administration, where revenues were down 2% to $284.3 million.

Compare this with ASX Ltd. It also reported strong first half FY18 results, delivering a 5.1% increase on the prior year’s first half net profit. Operating revenues were $409 million, which represented a $22.4 million, or 5.8%, increase on the prior comparative period. Revenue growth was supported by strong results across most key areas of the business, capitalising on a long period of low market volatility and positive investor sentiment.

However recent news of tariffs and trade wars has panicked global markets and caused volatility to return to the ASX. The ASX benefits from economic stability as junior companies will be more likely to grow to a position where they are able to list, and investors will be more willing to inject capital into the market. Although volatility does add to trading volumes.

Link Group benefits from healthy financial markets as it provides research and analysis services as well as stakeholder education and advice. If new companies aren’t listing or investors start losing faith in financial markets demand for Link’s services will naturally decline.

Foolish takeaway:

Link Group is probably less concerned about global market volatility than ASX Ltd is. This is because the health of the ASX is much more closely related to market uncertainty. But both companies will do well when investor interest in the markets is high, and this generally comes about when people have faith in the direction of the overall economy.

Link delivered much more explosive growth, but most of that was driven by the acquisition of its new Asset Services division, which adds a significant amount of debt to its balance sheet. I would encourage potential investors to wait until this new division has proven itself as a growing business before investing in Link.

ASX, on the other hand, despite being more exposed to global economic uncertainty, has done a great deal to cut its costs over the last year. Plus it also pays out a healthy 3.7% fully franked dividend yield. I wouldn’t ignore Link completely, but my pick of the two stocks right now is ASX Ltd.

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Motley Fool contributor Rhys Brock has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of ASX 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 Scott Phillips.

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