NetLink NBN Trust (NETLINK SP) - UOB Kay Hian 2017-08-29: Unassailable Foundation Of Next Gen NBN

NetLink NBN Trust (NETLINK SP) - UOB Kay Hian 2017-08-29: Unassailable Foundation Of Next Gen NBN NETLINK NBN TRUST CJLU.SI

NetLink NBN Trust (NETLINK SP) - Unassailable Foundation Of Next Gen NBN

  • NetLink operates the only passive fibre infrastructure to provide wholesale dark fibre services for ultra-high-speed fibre connections. It has a dominant market share of 81.7% for residential and 30.8% for non-residential connections, where growth is projected at a 5-year CAGR of 7.2% and 10.1% respectively in 2016-21. 
  • The Smart Nation initiative also provides numerous opportunities for growth. 
  • Initiate coverage with BUY. Target price: S$0.93.



WHAT’S NEW


Futile to replicate NetLink’s extensive passive infrastructure. 

  • NetLink NBN Trust (NetLink) is the sole network company for Next Gen NBN. Its extensive nationwide coverage acts as a barrier to entry. 
  • To date, NetLink has received aggregate grants of S$732m for the construction of passive fibre infrastructure. Without similar support from the government, it would be almost impossible for any potential competitor to provide a viable alternative or meet current regulated wholesale pricing.

Growth propelled by migration from ADSL and HFC to fibre connections. 

  • Independent industry consultant Media Partners Asia Ltd (MPA) estimated the penetration for legacy ADSL and HFC-based connections at 17.9% as of Mar 17. MPA expects all ADSL subscribers to migrate to fibre connections by Dec 19, and HFC-based services to cease by Dec 21. As such, residential fibre broadband subscribers are projected to increase at a 5- year CAGR of 7.2% in 2016-21.

SMEs drive demand for non-residential connections. 

  • Growth drivers for the nonresidential segment include SMEs and cloud-based applications. To encourage the adoption of fibre broadband among SMEs, the government has provided a 50% subsidy capped at S$120/month for up to 24 months for SMEs subscribing to fibre broadband plans with speeds of at least 100Mbps. 
  • MPA projects non-residential fibre broadband subscribers to grow at a 5-year CAGR of 10.1% between 2016-21.

Growth from Smart Nation initiative. 

  • The Smart Nation platform is a government initiative to build a pervasive network of sensors and probes deployed to collect real-time environmental information, process them and share them among government agencies and private sector participants. 
  • Prime Minister Lee Hsien Loong said that Smart Nation will make the economy more productive and Singaporeans’ lives more convenient. Smart Nation would have a positive impact on demand for NetLink’s NBAP connections.


STOCK IMPACT


Initiate coverage with BUY. 

  • NetLink NBN Trust is unique in being the sole network company for Next Gen NBN. Its extensive nationwide coverage creates a barrier to entry.
  • NetLink NBN Trust has a dominant market share of 81.7% for residential and 30.8% for non-residential connections, where growth is projected at a 5-year CAGR of 7.2% and 10.1% respectively for 2016-21.


EARNINGS REVISION/RISK

  • We forecast DPU of 2.78 S cents for FY18 (8-month period from listing date 19 Jul 17 to 31 Mar 18), 4.85 S cents for FY19 and 5.21 S cents for FY20.


VALUATION/RECOMMENDATION

  • Our target price of S$0.93 for NetLink NBN Trust is based on DCF methodology (cost of equity: 6.5%, terminal growth: 2%).
  • The stock provides attractive distribution yield of 5.6% (annualised) and 6.0% for FY18 and FY19, respectively.


SHARE PRICE CATALYST

  • Continued growth for residential and non-residential fibre connections.
  • Growth in demand for NBAP connections should the government accelerate the rollout for the Smart Nation initiative.
  • Investors seeking defensive yield from NetLink NBN Trust’s resilient, predictable, transparent and regulated cash flows.




Jonathan Koh CFA UOB Kay Hian | http://research.uobkayhian.com/ 2017-08-29
UOB Kay Hian SGX Stock Analyst Report BUY Initiate BUY 0.93 Same 0.93



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