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Why Credit Suisse is tipping a big turnaround for embattled Link Administration Holdings Ltd

The big crash in the share price of Link Administration Holdings Ltd (ASX: LNK) could prove to be a godsend for value investors at a time when real bargains are hard to find as the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index is rallying to near 10-year highs.

Link had been belted since the government revealed changes to superannuation accounts when it handed down the federal budget and the stock is struggling to recover from record lows since.

But this is a great time to be buying the stock, according to Credit Suisse who calls this an “opportunistic buying opportunity”.

The broker upgraded Link to “outperform” from “neutral” after management provided an update to the market on Tuesday to reassure investors that the sky hasn’t fallen on the business.

Link had been under a cloud because the federal government will force all super accounts with less than $6,000 balance that have not received a contribution in the last 13 months to be transferred across to the Australian Tax Office (ATO) to protect these account holders from unnecessary fees and charges.

This could have a very significant negative impact on Link’s bottom line as the company estimates that the policy could shave $55 million a year off its top line in the worst-case scenario. That amount represents around 7% of FY17 group revenue.

But the true impact may be more muted as management said that superannuation funds who are clients of Link will actively engage with their members to mitigate the number of super accounts that are transferred to the ATO.

Link also has some downside protection in its contracts with its super clients that would guarantee minimum payments even if member accounts were to drop below a certain level.

“We believe the impact will likely be far less significant (circa half the bear case),” said Credit Suisse.

“On our downgraded earnings we now believe LNK’s earnings risk is skewed to the upside with potential for additional bolt-on acquisitions (pre-funded through the recent equity raise), entry into the Hong Kong registry market (leveraging its Orient Capital relationships), cost synergy beats on the LAS acquisition and potential proceeds/mark market gains on a PEXA IPO.”

The broker also believes there is a good chance that the federal government will water down its policy, although there is no denying that the regulatory change will hurt Link.

On that basis, Credit Suisse has cut its price target on the stock to $8.10 from $9.00 and that is on top of the 23.76 cents a share dividend in FY19.

Meanwhile, stocks that are seen as beneficiaries of Treasurer Scott Morrison’s federal budget include annuities provider Challenger Ltd (ASX: CGF) and engineering and construction groups Downer EDI Limited (ASX: DOW) and Cimic Group Ltd (ASX: CIM).

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Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. 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 Scott Phillips.

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