NetLink NBN Trust - DBS Research 2018-05-16: Strong Dividend Yield Play

NetLink NBN Trust - DBS Vickers 2018-05-16: Strong Dividend Yield Play NETLINK NBN TRUST SGX: CJLU

NetLink NBN Trust - Strong Dividend Yield Play

  • Higher-than-expected DPU of 3.24 Scts declared for FY18. 
  • Forecast Period 2018 net profit ahead of forecasts. 
  • Operational figures for residential and non-residential connections ahead of expectations. 
  • Maintain BUY, Target Price of S$0.97; FY19F yield of c.5.7% remains attractive. 



Strong dividend yield play.

  • We believe that NetLink NBN Trust's (NLT) FY19F yield of c.5.7% remains highly attractive given the low volatility in NetLink Trust share price and we argue that it should trade at FY19F yield of 4.9% (versus 5.7% now) reflecting lower earnings volatility and ample debt-headroom for future growth.
  • NLT’s business environment is less volatile as 92% of its businesses are regulated. Projected FY19F total debt-to-EBITDA ratio of 2.7x is much lower than the 5.3x average for Business Trusts in Singapore/Hong Kong, implying room for higher growth by optimising its capital structure. 


Where we differ:

  • We believe the market is concerned that rising interest rates may lead to a search for higher yield. NLT has hedged its interest rates till March 2021 and growth in distributions (4.6% CAGR over FY18-20F) should translate into higher distribution yields.
  • NLT's one unique advantage over REITs and Business Trusts is that any potential rise in the cost of capital might lead to higher regulated returns from 2022 onwards, translating into higher distributions. 


Potential catalysts:

  1. Newsflow on TPG Telecom’s backhaul roll-out leveraging on NLT’s infrastructure in early 2018,
  2. Widened scope of Smart Nation initiatives as NLT could use its debt headroom to invest in those initiatives, leading to a healthy growth in distributions in the long term, and
  3. More clarity on 5G rollout and if NLT could be involved. 


Valuation: 

  • Maintain BUY, Target Price of S$0.97. Our DCF valuation is based on WACC of 5.7% and terminal growth of 1.2% (long-term household formation rate). 


Key Risks to Our View: 

  • Key risks to our view are regulatory changes. As ~80% of the revenue is regulated under the RAB model, any changes in nominal pre-tax WACC from 2022 onwards may lead to changes in Interconnection Offer (ICO) pricing. 


WHAT’S NEW - Higher-than-expected DPU declared for FY18; Forecast Period 2018 (FP18) net profit ahead of forecasts 


FP18 earnings ahead of forecasts.

  • For the full forecast period (19 June 2017 to 31 March 2018), revenue of S$228.6m was 1.8% below NLT’s forecast while NPAT of S$50.0m was 10.8% ahead of forecasts due to lower operating expenses recorded in the period. 
  • 4Q18’s revenue of S$80.7m was 4.4% lower than NLT’s forecast on lower installation-related revenue, offset by higher revenues from the other segments. As a result, NPAT of S$15.3m for the quarter was 6.4% lower than NLT’s forecast. Lower installation-related revenue were largely attributed to three factors:
    1. loss of revenue as NLT’s customers perform certain installation-related work (e.g. digging and trenching) in-house
    2. service activation charge to be recognised over three years as obligation of unpatching has not been performed
    3. lower-than-expected termination point installation. 

Lower costs help lift margins.

  • NLT saw a broad-based reduction of costs including operation and maintenance costs, installation costs, staff costs, finance costs and other operating expenses, lifting EBITDA margins to 71.0% for 4Q18 (NLT’s forecast: 69.2%). 

Operational figures were mostly ahead of expectations.

  • As of 31 March 2018, NLT had 1.19m residential connections (+0.8% from NLT’s forecast), and 43.9k non-residential connections (+2.4% from NLT’s forecast). NBAP connections also saw a strong growth of 31% in 4Q18 to 835 connections. However, NBAP connections were below forecast due to slower-than-expected project deployment from customers.Higher-than-expected DPU declared for FY18.
  • NLT had previously forecasted a DPU of 2.93 Scts for the forecast period 2018, against our forecast of 3.02 Scts. Final DPU of 3.24 Scts was c.11% higher than NLT’s forecasts, representing annualised yield of 5.7% for FY18. 


Outlook and Recommendation 


DPU of 4.64 Scts (as indicated in IPO prospectus) to be declared in FY19.

  • According to NLT, FY19F DPU will be as per forecast in the IPO prospectus. This translates into forward dividend yield of 5.7% at its current share price (81.5 Scts). 

Monitoring 5G development in Singapore among others.

  • NLT is monitoring 5G development in Singapore and seeks to explore opportunities associated with 5G technology. 
  • In the meantime, NLT continues to expand its network locally and support the Smart Nation initiatives of Requesting Licensees, government agencies and end-users, such as the developments in Punggol Digital District and Jurong Innovation District. 

Still a strong dividend yield play, maintain BUY with Target Price of S$0.97.

  • We maintain our BUY call on NLT with Target Price of S$0.97 following earnings adjustments of +3%/-4% for FY19F/20F after lowering expenses estimates, installation revenues and NBAP connections’ growth. 
  • We believe that its FY19F yield of 5.7% remains attractive, given the low volatility in NLT’s share price. 





Sachin MITTAL DBS Vickers | Rui Wen LIM DBS Vickers | https://www.dbsvickers.com/ 2018-05-16
SGX Stock Analyst Report BUY Maintain BUY 0.970 Same 0.970



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