SWTZ stock in focus: Link Group

A key objective for the Switzer Dividend Growth Fund (ASX:SWTZ) is to provide income, maximising franking where possible, and long-term capital growth by investing in a portfolio of blue chip Australian shares. The Fund has a portfolio yield of 5.4%* (7.3% 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 provides 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 Group.

Link Group (ASX:LNK)

Link Group (LNK) is the largest outsourced fund administration service provider for super funds in Australia.

The company’s largest operation is Fund Administration. 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. The asset was “the jewel in the crown” from a distressed seller and has common businesses to LNK but based in the UK. 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. The opportunity is to grow and embed the 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.

Share price volatility

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. Reasons for the volatility include takeover announcements and winning/losing a number of key contracts.

Link vs ASX 200. Source: Google Finance. Data as at 19 November 2018.

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. LNK now appears set to become the dominant operator in the 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 PE ratio of 16.5X as attractive. The blend of good growth and yield make it a solid investment for SWTZ. We will continue to monitor the progress as the company successfully grows.

* SWTZ yield calculated as last year’s distributions relative to 31 October 2018 unit price.

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