Singtel - RHB Invest 2017-06-30: Unlocking The Trust

Singtel - RHB Invest 2017-06-30: Unlocking The Trust SINGTEL Z74.SI Netlink Trust IPO Prospectus

Singtel - Unlocking The Trust

  • The impending listing of Netlink NBN Trust (NLT) would unlock and crystallise the value of the owner and developer of fiber assets for Singtel.
  • Based on the recent draft prospectus lodged with MAS (link), NLT’s go-to-market valuation of SGD3.4-3.6bn implies a 16.7x FY18F EV/EBITDA, which is supported by its resilient and captive business model. 
  • We do not rule out Singtel returning the proceeds of the sell-down by way of a special dividend. 
  • Maintain NEUTRAL with a SOP-based Target Price of SGD3.90 (2% upside) as we remain concerned over the heightened competitive risks in Singapore and Australia with the entry of TPG Telecom. 
  • YTD, Singtel’s share price has gained 6.6% vs FTSE Straits Times Index’s (STI) 13%.

A diet high in fiber. 

  • Netlink NBN Trust (NLT) had, on 27 Jun, lodged its preliminary IPO prospectus (link) with the Monetary Authority of Singapore (MAS) targeting a listing timeline of mid-July. The listing comes ahead of a ruling by the Infocomm Media Development Authority (IMDA) for Singtel to pare down its stake in NLT to less than 25% by Apr 2018.
  • NLT would be the second business trust to be listed on the Singapore Exchange (SGX) after Hutchison Port Holdings Trust ((HPHT SP, NR) in 2011. The trust group designs, builds, owns and operates the passive fiber network infrastructure of Singapore’s next generation national broadband network (NGNBN).

Offer price of SGD0.89-0.93/share. 

  • The final offer price would be determined by way of a book-building process targeted for 10 Jul.
  • At the indicative valuation, NLT is priced at 16.7x FY18F EV/EBITDA – a premium to the domestic telco sector average of 9.2x and HPHT’s FY18F EV/EBITDA of 11.2x. We believe this is fair considering the strong recurring revenues and cash flow profile of NLT.
  • NLT’s revenue streams are predictable and regulated by IMDA by way of an interconnection offer (IO). IO prices were last reviewed and revised in May 2017 and would take effect from Jan 2018. 
  • The trust remains the dominant/exclusive provider of fiber infrastructure to residential homes in Singapore with 1.1m residential end-user connections. It has a 31.7% share of the non-residential fixed broadband market.

DPU yield at sub 6%. 

  • Based on the offer price range, Netlink NBN Trust (NLT)’s prospective DPU yield range from 5-5.8%, which we consider as decent based on a 100% cash distribution. This compares with HPHT’s prospective dividend yield of 6-7% while the prospective yield of SREITs average at 6.4%.

Room for higher dividends? 

  • There is a possibility that Singtel may return additional cash from the sell-down of NLT (14-15 cents/share), possibly to be declared in 4QFY18 (Mar). 
  • Our current DPS forecast assumes 18 cents/share for FY18, which implies a payout of 70% (management’s on-going guidance is for a 55-70% payout from its core earnings) and dividend yield of 4.7%. This could rise to c.8% in the event of a special dividend. 
  • Singtel last paid a special dividend of 10 cents/share in FY11.

Maintain NEUTRAL. 

  • While the impending listing of NLT is a share price catalyst, we keep our NEUTRAL rating based on an unchanged SOP-based Target Price of SGD3.90 (14x FY18F EV/EBITDA)
  • Concerns over the heightened competition in Singapore and Australia with the entry of TPG Telecom as well as data monetisation challenges remain the key de-rating catalysts.
  • Key upside risks are: 
    1. less intense competition in the key mobile markets of Singapore, Australia, Indonesia and India, 
    2. a faster turnaround of its digital businesses, 
    3. lower-than-expected capex and 
    4. dividend surprises.

Singapore Research RHB Invest | http://www.rhbinvest.com.sg/ 2017-06-30
RHB Invest SGX Stock Analyst Report NEUTRAL Maintain NEUTRAL 3.900 Same 3.900