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

NetLink Trust - Maybank Kim Eng Research 2018-09-07: Safety First NETLINK NBN TRUST SGX:CJLU

NetLink Trust - Safety First

Defensive-yield play. Initiating with a BUY

  • 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.

Backbone of the digitalization of a nation

~ 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.

Regulated returns is a two-way street

  • 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.

Potential payout upside if balance sheet is optimized

  • 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.

Swing Factors


  • 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