NetLink NBN Trust (NETLINK SP) - UOB Kay Hian 2018-09-17: The Ultimate Defensive Stock

NETLINK NBN TRUST (SGX:CJLU) | SGinvestors.io NETLINK NBN TRUST SGX:CJLU

NetLink NBN Trust (NETLINK SP) - The Ultimate Defensive Stock

  • NetLink has dominant market share of 90% for residential and 35% for non-residential fibre connections, where growth is projected at a three-year CAGR of 6.2% and 8.5% respectively in FY18-21. 
  • It is the most defensive stock listed on the SGX due to:
    1. low volatility but high liquidity,
    2. its catering to basic necessities,
    3. stable and recurrent revenue streams,
    4. beneficiary of higher domestic interest rates,
    5. high barriers to entry, and
    6. blue-chip customer base.
  • Maintain BUY. Target price: S$0.95.



WHAT’S NEW


Residential: Migration to fibre boosts take-up.

  • NetLink NBN Trust (NetLink) added 24,600 residential connections in 1QFY19, representing an increase of 2.1% q-o-q. There is an untapped market of 300,000 residential homes, representing those not on fibre broadband (ADSL and cable) and new household formation over the next five years.
  • NetLink will expand network coverage to new housing estates at Sengkang, Punggol and Tengah and, over the longer time horizon, to the Greater Southern Waterfront project.
  • The government’s Home Access Programme will further increase penetration for fibre broadband by providing subsidy of up to S$21.50 per month for low-income households.

~ SGinvestors.io ~ Where SG investors share

Non-residential: Targets market share beyond 35%.

  • NetLink added 900 non-residential connections in 1QFY19, up 2.1% q-o-q. Many SMEs are getting connected to fibre broadband due to the government SMEs Go Digital programme that provide grants for a suite of pre-approved digital solutions to enhance productivity.
  • NetLink’s competitive advantage lies in areas outside of CBD and business parks due to its extensive nationwide coverage. There are also opportunities for growth at Jurong Innovation District and Punggol Digital District.

Smart Nation initiatives drive demand for NBAP connections.

  • NetLink added 294 non-building access point (NBAP) connections in 1QFY19, representing an expansion of 35.2% q-o-q. NetLink provides fibre connections sensors to support applications, such as high-definition surveillance cameras and advertising billboards.

Unaffected by entry of fourth mobile operator.

  • On the contrary, TPG Telecom is a customer and relies on NetLink’s NBAP connections for backhaul transmission. TPG is expected to require NBAP connections for 3,000 base stations over the next three years. The advent of 5G will increase the densification of mobile networks.
  • In future, all mobile operators will require more NBAP connections for their macro cells and small cells.

Debt headroom for future expansion.

  • NetLink’s gross debt/EBITDA was 2.5x as of Jun 18. Management targets to maintain a credit rating of at least BBB+. As such, management intends to keep total debt/EBITDA at below 4x.
  • There is sufficient debt headroom for NetLink to utilise debt financing for future expansion into:
    1. pervasive network for Smart Nation initiatives, and
    2. shared 5G network infrastructure.
  • We expect NetLink’s expansion to be Singapore-centric.


STOCK IMPACT


The ultimate defensive stock.

  • In our opinion, NetLink NBN Trust is the most defensive stock listed on the SGX.
  1. Low volatility but high liquidity. NetLink’s share price is usually stable and not volatile. According to Bloomberg, NetLink has a low beta of 0.46x, which means that movements in its share price are less correlated to the broader stock market. Trading of NetLink shares is also highly liquid.
  2. Catering to basic necessities. Fixed broadband connections are basic necessities as many daily activities now require access to Internet and cloud-based services. With appropriate routers, they could provide WiFi hotspots. In Singapore, telcos typically provide unlimited data for fixed broadband, which means that users could conveniently download and upload lots of data.
  3. Stable and recurrent revenue streams. The interconnection offer prices charged by NetLink are determined using the regulated asset base (RAB) methodology. Pricing for residential and non-residential fibre connections are fixed at S$13.80 and S$55.00 per month for the next five years (Jan 18 to Dec 22). They are unaffected by market competition, including new entrants penetrating the fixed broadband market, and economic cycles. NetLink is also unaffected by churn when fibre broadband subscribers switch from one retail service provider to another.
  4. Beneficiary of higher domestic interest rates. NetLink has put in place appropriate hedging to fix interest rate at 2.91% until Mar 21. Higher domestic interest rates would translate to higher pre-tax WACC from 2022 onwards, which would exert positive impact on NetLink’s interconnection offer prices.
  5. High barriers to entry. NetLink is the sole network company for Next Gen NBN. It 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 match NetLink’s extensive nationwide coverage or current regulated wholesale pricing.
  6. Blue-chip customer base. NetLink’s customers are established players in the telecommunications industry, such as Singtel, StarHub and M1.

Maintain BUY.

  • NetLink NBN Trust has dominant market share of 90% for residential and 35% for non-residential connections, where growth is projected at 3-year CAGR of 6.2% and 8.5% respectively in FY18-21.


EARNINGS REVISION/RISK

  • We forecast DPU of 4.5 S cents for FY19 and 4.7 S cents for FY20.


VALUATION/RECOMMENDATION

  • Our target price of S$0.95 is based on DCF methodology (cost of equity: 6.5%, terminal growth: 2%).
  • The stock provides attractive distribution yields of 5.8% and 6.0% for FY19-20 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 ted cash flows.





Jonathan Koh CFA UOB Kay Hian Research | https://research.uobkayhian.com/ 2018-09-17
SGX Stock Analyst Report BUY Maintain BUY 0.95 Up 0.930



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