NetLink Trust - Maybank Kim Eng 2018-09-07: Safety First

NETLINK NBN TRUST SGX:CJLU

NetLink Trust - Safety First

As Singapore’s de facto fibre broadband network monopoly, NetLink Trust offers a captured market and stream of sustainable cashflows to support capex and its 100% cash distribution policy.
We believe NetLink’s business structure is less volatile than other yield plays such as REITs and telcos. Better earnings stability and visibility on an average 3% DPU growth over FY19E-22E merit a BUY, in our view.
Any changes to its regulated returns based on a 7% pre-tax, regulatory WACC is the key upside or risk to outlook.

~ SGinvestors.io ~ Where SG investors share

NetLink is the sole nationwide provider of the passive fibre network infrastructure of Singapore’s NBN. It has the monopoly of residential fibre network deployment with 82% of households on the service as of Jun 2018 and we forecast 95% to be on fibre by FY21E. On the non-residential side, it has 34% share of the fixed broadband market that it intends to grow through SMEs and enterprise digitalization efforts.
Meanwhile, NBAP and segment connections are expected to surge as part of the development of a network of sensors deployed as part of the government’s Smart Nation initiatives. These are the primary drivers for the 19% revenue CAGR we forecast for FY18-FY21E.
Our DDM-based (6.0% COE, 0% LTG) Target Price of SGD0.93 offers healthy upside that drives our BUY.

As a structural monopoly, 92% of NetLink’s FY18 revenues were linked to a regulated rate structure that is rebased every five years and subject to mid-term reviews by the IMDA. Any material positive or negative variance from projections could result in revisions in the regulated ICO rates during a mid-term or end-term review.
The long-term yield and value of the stock is thus virtually locked in by regulation. A 50bps change in COE would lead to a +/- 8% change in our target price.

NetLink’s gearing at 15-17% over FY19E-21E is well below that of REITs and telcos of 24-107%. Theoretically, optimizing the balance sheet to a gearing level of 35% could unlock an additional SGD600m (SGD0.15 / sh) for potential distribution in the event there is no major additional capex in the medium term.

Stronger-than-expected demand may enable an increase in regulated capex that will provide additional guaranteed returns.
Increased business expansion outside the CBD could provide new non-residential connections in areas where NetLink is the virtual sole fibre provider.
Market earnings risk-aversion cycles could boost interest in NetLink’s stable returns.

Any downward revision in the regulated returns during the next review period impacts long-term fair value.
Pricing competition in the non-residential segment.
Rising interest rate cycle would reduce the attractiveness of NetLink and similar stocks in the same asset class.

Luis Hilado Maybank Kim Eng Research | https://www.maybank-ke.com.sg/ 2018-09-07

SGX Stock Analyst Report BUY Initiate BUY 0.93 Same 0.93