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

NETLINK NBN TRUST (SGX:CJLU)

NetLink NBN Trust - Soothing Nerves In A Volatile Market

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.

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.

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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