Stock in focus: Link Administration Holdings

A key objective of the Switzer Dividend Growth Fund is to provide quarterly income, maximising franking where possible, and long-term capital growth by investing in a portfolio of blue-chip Australian shares. The Fund has a yield* of 6.1% (7.9% including franking). This is compared to the ASX 200 yield of 4.6% (6.0% including franking).

As such, we look for stocks that have sustainable cash flow along with strong balance sheets which provide the ability to pay regular income.

In this mid-monthly update, I would like to present a stock we hold in the SWTZ portfolio that reflects this investment philosophy, Link Administration Holdings.

* SWTZ yield calculation based on distributions paid during the past 12-months relative to the closing unit price of $2.54 at 31 October 2017.

Stock in Focus: Link Administration Holdings (ASX:LNK)

Link is the largest outsourced fund administration service provider for super funds in Australia.

While fund administration is the company’s largest operation, other services include corporate markets services, such as share registry and share plans.

In late 2017 LNK made a major acquisition in the UK, buying Capita Asset Services for $1.4 billion, a bold move at the time. Based in the UK, the asset was “the jewel in the crown” from a distressed seller which has common businesses to LNK. LNK raised equity to fund the acquisition.

The acquisition has started very well, giving investors encouragement that LNK has acquired well and can grow off this solid base.

Technology is a core competency of the business. LNK offers services to clients that process high volumes of low value transactions as efficiently as possible – certainly more efficiently than existing in-house providers can deliver. The opportunity is to grow and embed their technology into clients’ operations and deliver value that is too inconvenient to change. Needless to say, LNK spends a lot on technology with the aim to be the best in class provider of their services.

LNK is a relatively volatile stock. Over the past two years the share price has gone from $6.87 to almost $9 and back again off the back of takeover announcements and winning/losing a number of key contracts.

Just this month, in a consortium with Morgan Stanley and Commonwealth Bank, Link acquired the operations of PEXA. PEXA is the newly formed electronic property settlements business. Over $300 million has been spent building the business with the deep involvement of the major banks, State Government land transfer agencies, real estate agents and conveyancing professionals.

The operation has taken years to come together but now appears set to become the dominant operator in a field that lends itself to a monopoly provider. LNK has been a shareholder in PEXA so knows the business well. The PEXA shareholders attempted a float of the business, which floundered with the recent market volatility. LNK was waiting on the sidelines and bought the business at a cheaper price.

These two acquisitions give LNK a significant opportunity to grow, but both depend on successful execution. The underlying business should generate reasonable growth as well.

Given the growth opportunities we see the current yield of 4.8% grossed up and the price earnings ratio of 16.5X as attractive. The blend of good growth and yield make it a solid investment for the fund. We will continue to monitor the progress as the company successfully grows.

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