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29 August 2019 | Buy

Bought shares in in Link Administration Holdings (LNK)

Link is an Australian and U.K. financial services administration sector via its leading positions in fund administration and share registry services. Client retention rates exceed 90% in both markets, underpinned by inflation-linked contracts of between two and five years. Earnings growth is supported by organic growth in member numbers, industry fund consolidation, and continued outsourcing trends while the capital-light nature of the business model should produce good cash conversion and regular dividends for investors.

Today, Link reported FY19 results that meet previously downgraded guidance and while the outlook was a little softer than expected positive commentary around client retention as two major Industry Superfund clients (Australian Super and REST) renewed contracts while in the UK they won new mandates which is encouraging given corporate activity has suffered given ongoing Brexit concerns. Other notable positives came from their dominant electronic land registries business PEXA (that they increased their holding to 44% this year) that has seen volumes continue to grow ahead of forecasts and this technology-focused business provides some longer-term blue sky upside for investors. Increasing cost savings targets coupled with non-core assets sales has strengthened the balance sheet enabling management to reward shareholders by declaring a better than expected 12.5c fully franked dividend (that you will receive) as well as announcing a new 10% share buy-back program and this inorganic earnings growth is much preferred in the current volatile market climate.

Overall the report removes some short term negatives that have plagued the stock over the past few months and we feel that recent weakness provides an attractive entry point to build a position. Trading at a below-market 15 times forward earnings while yielding 4.5% fully franked dividend yield we see excellent long term value.