"What's your take on the effect of Brexit and Woodford crisis on LNK? Surely, once these are out of the way then nothing will be holding LNK back. "
I'm afraid I am not going to be able to be offer you any useful insights about The Brexit and Woodford issues. They are extraneous factors of which the company has little to no control; as a business owner I am far more interested in how the managers of the companies I own are managing the things that are within their control or over which they have influence.
Besides, I am a long-term investor and because I believe that Brexit and the Woodford dramas are merely temporary, which will be all but forgotten in 2 or 3 years' time, I pay very little attention to them.
"Also what's your fair value for LNK?"
That's a very relevant question and one which is actually quite difficult to answer in any definitive manner.
The challenge with assessing a valuation for LNK is that the company's P&L is both complicated and is also very fluid, given the active manner in which the company's business portfolio is managed: in just about every year since listing there have been significant acquisitions and/or divestment of businesses meaning that it is nigh on impossible to discern the steady state, underlying financial performance of the company over time.
And with these acquisitions/divestments have come all sorts of non-recurring expenses and one-off profits, along with restructuring charges, adding back amortisation of acquired goodwill and write-downs; and in the most recent result, there were some significant accounting adjustments that needed to be made due to the added stake acquired in PEXA.
But to decipher what is going on in the P&L from one financial period - while not quite requiring the skills of a forensic accountant - does require the use of an Excel spreadsheet and a fair dollop of mental plasticity, at a very minimum!
Which is why the company has been obliged, in its result presentations, had to include all manner of "pro forma" financial figures, in order to help investors figure things out:
Of course, "pro forma" numbers can mean just about anything, so we are reduced to a situation of "Trust Us".
The EBITDA line I can reconcile reasonably well, but the further one moves down the P&L, the more indecipherable it becomes.
For that reason, EV/EBITDA - which is a somewhat crude investment metric - is probably the best valuation metric for LNK.
On that score, as a starting point we have a $2.9bn market cap company, with around $600m in Net Debt, so an Enterprise Value of ~$3.5bn.
On FY2019's trailing EBITDA of $320m, that comes to an
EV/EBITDA multiple = 11.0x.
For a financial services company of LNK's pedigree, market positioning, global scale, free cash generation abilities, intellectual property and long-duration growth opportunities, an EV/EBITDA multiple anywhere between 10x and 14x could be argued to be fair and reasonable.
(For context, CPU's EV/EBITDA multiple is currently
11.9x, having averaged around 13x over the course of 2017 and 2018, reaching as high as 14.5x at times over that period.)
So, at first glance, LNK is trading close to the bottom of what I would consider to be a fair value range of valuations, and at a discount to listed peer CPU (although CPU is a larger company with a longer financial and listed history and its financial accounts are, arguably, a lot cleaner than LNK's, so some discount is probably warranted, maybe equivalent to a single EV/EBITDA point multiple.)
So, if CPU is valued at ~12x EV/EBITDA, then LNK, I argue, can justifiably trade at 11x EV/EBITDA. Which, prima facie, is where it is currently trading now.
Of course this all overlooks one very important aspect of LNK, and that is its 44% interest in PEXA, which is carried on LNK's books at $700m.
Yet PEXA is currently making no financial contribution to LNK's earnings or cash flows.
It is therefore incumbent to strip out PEXA's value from LNK's EV.
Assuming 44% of PEXA is not worth anything more than the $700m of book value (somewhat unlikely, I think), then LNK's adjusted EV becomes $2.8bn, and the adjusted trailing EV/EBITDA multiple is just
8.8x.
Solving for a fair value, using the 11x fair value EV/EBITDA multiple - but with PEXA eliminated from the EV - yields a price for LNK of
$6.75/share.
And if PEXA ends up being worth more than $700m, say $1.0bn (which it could easily be), then we are talking about fair value of
$7.30/share for LNK
.
I have heard some blue-sky figures being bandied about of PEXA having all the hallmarks and scope of being a $2.0bn or $2.5bn business. I don't know about that, but if it ends up being correct, then LNK could almost double in value from current levels.
Clearly, deriving a valuation for LNK boils down to forming a view of what PEXA is ultimately going to be worth, given that whatever that valuation ends up being, it is a very meaningful figure in the context of LNK's current market value.
So for that reason it is difficult today to specify a fair value for LNK.
My view, despite the modest rebound in the stock over the past few weeks, is that the current market value of the company reflects only it's core (i.e., non-PEXA) businesses.
Meaning that investors buying the stock today are essentially getting PEXA for free.
And PEXA is currently valued at $1.30/share (but could easily be worth $2.00/share, and possibly worth as much as $3.00/share).
So, to conclude:
Q: How much is LNK worth?
A: More than the current market price... between $1.30 (25%) higher and $2.50 (45%) higher.
..