NETLINK NBN TRUST
CJLU.SI
NetLink NBN Trust (NETLINK SP) - 3QFY18 A Shelter From Volatilities
- Residential connections tracked expectations but non-residential connections beat expectations. EBITDA margin at 75.7% was 6.9ppt above the company’s forecast due to lower maintenance and staff costs.
- Some of the costs were deferred and could be incurred in 4QFY18.
- Maintain BUY due to NetLink’s dominance in residential connections and its defensive qualities, which provide a defensive shelter against market volatilities.
- Target price: S$0.93.
RESULTS
- NetLink NBN Trust (NetLink) reported net profit of S$21.7m for 3QFY18, in line with our expectations but above the forecast provided in its IPO prospectus. Net profit of S$34.7m for 9MFY18 (5-month period) is 64.5% of our full-year forecast for 2018.
Revenue tracking forecast.
- NetLink achieved revenue of S$83.4m with growth in contributions from residential and non-residential connections, ducts & manholes and central offices. Installation revenue was lower than anticipated due to the decrease in demand for installation of fibre termination points (new condominiums and HDB flats comes with FTP pre-installed).
- End-users for residential fibre connections grew 2% q-o-q to 1,165,028 in 3QFY18 (9MFY18: 6.4% ytd) due to organic growth and migration from ADSL and cable connections to fibre connections. End-users for non-residential grew by a robust 2.9% qoq to 43,228 (9MFY18: 12.2% ytd).
- We expect the strong take-up from non-residential end-users to be driven by SMEs operating outside the CBD.
Executing well on cost control.
- EBITDA was 10.8% above the company’s forecast due to lower operation & maintenance costs, staff costs and other operating expenses.
- Maintenance for central offices was deferred and could be postponed to 4QFY18. Its headcount was lower than projected and labour costs incurred to set up its new IT system were capitalised. EBITDA margin was 75.7%, 6.9ppt above the forecast provided in its IPO prospectus.
Strong financial position.
- NetLink has healthy cash holdings of S$129m. It has a strong balance sheet with gross debt/EBITDA at 2.2x (before IPO: 2.4x) and EBITDA interest cover at 8.0x based on trailing 12-month financials.
STOCK IMPACT
On track to meet projections.
- NetLink is on track to meet its DPU forecast of 2.93 S cents for FY18 (8-month period from listing date 19 Jul 17 to 31 Mar 18) as provided in its IPO prospectus.
Unassailable foundation of Next Gen NBN.
- NetLink is the sole network company (NetCo) for Next Gen NBN. It dominates the wholesale provision of dark fibre connections to residential premises.
- Its cash flows are defensive and resilient as wholesale pricing is regulated and fixed for five years after each review. Thus, it is unaffected when a fibre broadband subscriber switches from one service provider to another due to competition.
Continued expansion in residential and non-residential segments.
- NetLink has started to utilise the Hougang Central Office, its 10th central office, to serve new housing estates in the Northeastern area, such as Sengkang and Punggol. Management also plans to expand its network to serve the upcoming Tengah Estate, which would yield 42,000 new homes.
- NetLink continues to support retail service providers, such as Singtel, StarHub and M1, to acquire new corporate customers.
Growth from NBAP connections.
- NetLink supports government agencies in their Smart Nation initiatives. Management indicates that government agencies would disclose more information on Smart Nation initiatives over the next six months.
NetLink supports TPG Telecom to deploy its mobile backhaul network.
- TPG has given orders for non-building access points (NBAP) and has leased spaces at its central offices. TPG has to rapidly roll out its network due to requirement to provide nationwide coverage by Dec 18.
EARNINGS REVISION/RISK
- We maintain our existing earnings forecasts.
VALUATION/RECOMMENDATION
- Our target price of S$0.93 is based on DCF methodology (cost of equity: 6.5%, terminal growth: 2%).
- The stock provides attractive distribution yields of 5.1% (annualised) and 5.9% for FY18 and FY19 respectively.
SHARE PRICE CATALYST
- Continued growth in residential and non-residential fibre connections.
- Growth in demand for NBAP connections should the government accelerate the rollout of Smart Nation initiatives.
- Investors seeking defensive yield from NetLink’s resilient, predictable, transparent and regulated cash flows.
Jonathan Koh CFA
UOB Kay Hian
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http://research.uobkayhian.com/
2018-02-07
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