NetLink NBN Trust - OCBC Investment 2018-11-07: Soothing Nerves In A Volatile Market


NetLink NBN Trust - Soothing Nerves In A Volatile Market

  • NetLink NBN Trust’s 2QFY19 ahead of forecast.
  • More (and earlier) business from StarHub (SGX:CC3).
  • Unchanged Fair Value of S$0.90.

Firm set of results

  • NetLink NBN Trust’s (NLT NBN) 2QFY19 results exceeded its IPO expectations. Revenue of S$90.6m was 6.7% higher than its initial forecast, owing to higher diversion revenue as well as ducts and manholes service revenue.
  • The increase in diversion revenue of S$6.3m was due to the recognition of revenue from completed projects primarily for government agencies.
  • The higher ducts and manholes service was largely from recovery of costs from Singtel for ducts and manholes joint-build projects. However, installation-related revenue came in lower than projected, due largely to service action charges being recognised over a longer horizon as well as Requesting Licensees undertaking digging and trenching works within the Non-Building Address Point (NBAP) space that NLT NBN would have performed otherwise.
  • All considered, EBITDA of S$61.2m came in 3.0% higher than its initial forecast.
  • 2QFY19 EBITDA margin of 67.6% was 2.4%pts lower than projection, as diversion revenues carry lower EBITDA margins than that of the blended average.
  • Operationally, NLT NBN increased its residential and non-residential fibre connections by 2.0% and 1.6% q-o-q, respectively. NBAP connections rose 13.4% q-o-q, but this comes off a lower base relative to the residential / non-residential connections.

StarHub HFC migration timeline pushed forward

  • As reported in the media last week, StarHub (SGX:CC3) will be ceasing its cable services after 30 June 2019. Leaving aside potential upfront benefits from additional residential terminal points required as a result of this exercise, NLT NBN should be able to collect additional monthly recurring charges arising from greater fibre connections.
  • In any case, management does not expect this to move the needle significantly as the switch from HFC to fibre has already been taking place, albeit with a higher intensity moving forward.

Still an attractive yield

  • All considered, we maintain our Fair Value estimate of S$0.90. 
  • NLT NBN has declared a 1HFY19 DPU of 2.44 S-cents. On an annualised basis of 4.88, that would be a 5.2% increase over the projected DPU of 4.64 cents.
  • Considering its defensive attributes and stable cash flows, NLT NBN trades at an attractive FY19F yield of 5.9%, based on 5 Nov18’s closing price of S$0.78.

Joseph Ng OCBC Investment Research | https://www.iocbc.com/ 2018-11-07
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