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The Link share price has fallen 21.5% this year: is it a buy?

The Link Administration Holdings Ltd (ASX: LNK) share price is down 21.5% so far in 2019. At these prices it could be a good purchase for investors.

A closer look at Link

Link is a provider of outsourced administration services to superannuation funds and companies. It provides fund administration, shareholder management, share registry and company secretarial services to clients along with IT services and data analytics. Link is the biggest provider of administration services to the superannuation industry in Australia. The company listed on the ASX in 2015 and was the biggest float of that year.

Should investors buy shares in Link?

At its current share price, Link sits on a price-to-book ratio of 1.46. This is good value considering the company’s average return on equity has been 14.3% since it started reporting in 2016, which means that investors can anticipate solid growth on their investment. Last year, Link had a payout ratio of 52%, which means that if the company maintains its dividend policy investors can anticipate significant cash payments from these earnings. Link has a strong grossed-up dividend yield, currently at 5.65%.

The company’s reporting period ended on 30 June and its 2018 figures are now somewhat outdated; however, in its latest update last month, Link suggested that earnings should be around the same in the 2019 financial year, although perhaps slightly lower. This should mean continued dividends for yield-hungry investors. Dividends last year were fully franked.

Link’s current price-to-earnings (P/E) ratio of 13.15x is less than the broader market and considerably less than its rival in the share registry and shareholder services business, Computershare Limited (ASX: CPU), which has a PE of 22.45x at its current share price.

Link can be considered a stable business, with 80% of revenue recurring. The company employs some leverage with a debt-to-equity ratio of 43%; however, this should not be anything to alarm investors and can be managed. The company has cash flow that is higher than earnings and has done so every year since it listed, a sign that reported profits are not overinflated.

Link comes with some risks at present – it is currently being investigated in the United Kingdom over alleged misconduct by a client in relation to the running of a managed fund, and it is grappling with rising costs as regulatory changes sweep the superannuation industry in Australia. However, these factors are likely to be overcome quickly as the company gets back to earnings growth, something its CEO has promised to deliver.

Foolish takeaway 

The fall in the Link share price this year offers a good buying opportunity for investors. The company has a solid dividend yield and its earnings are stable, with the current issues weighing on the company likely to be short-lived.

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Motley Fool contributor Chris Chitty (buylowsellhigh5) has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of Link Administration Holdings Ltd. The Motley Fool Australia has recommended Computershare and Link Administration Holdings Ltd. 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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