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.

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.

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.

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.

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.

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.

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.

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.

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

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