NetLink NBN Trust - UOB Kay Hian 2018-11-21: Acceleration In Migration To Fibre Connections

NETLINK NBN TRUST (SGX:CJLU)

NetLink NBN Trust - Acceleration In Migration To Fibre Connections

Singtel (SGX:Z74)’s and StarHub (SGX:CC3)’s decision to retire their legacy ADSL and HFC networks would accelerate growth in NetLink’s residential fibre connection to 9% in FY19 and 6.2% in FY20.
NetLink is the most defensive stock listed on the SGX due to:
1. its low volatility but high liquidity;
2. it catering to basic necessities;
3. stable, recurrent and regulated 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$0.99.

StarHub (SGX:CC3) has decided to migrate its customers of both residential broadband and pay-TV to an all-fibre network. It will cease provision of cable services after 30 Jun 19 and retire its legacy hybrid fibre-coaxial (HFC) network. Singtel (SGX:Z74) has already closed its copper-based ADSL connections for broadband, TV and digital voice in 1H18. These moves by StarHub and Singtel accelerate the migration from ADSL and cable to fibre connections.
As of 30 Sep 18, StarHub had 473,000 residential broadband customers, of which 403,000 were fibre connections and 70,000 were cable connections. Singtel has 624,000 fixed broadband customers, of which 616,000 are fibre connections and 8,000 are ADSL connections. We estimate the number of fibre connections at NetLink NBN Trust (NetLink) would increase 9% in FY19 and 6.2% in FY20.
The migration to fibre broadband would be completed within 2019.

Management is closely monitoring developments on the roll-out of 5G networks in Singapore. NetLink could support the four mobile operators on deployment of fibre for their 5G networks. It is open to make investment to support network sharing among the four mobile operators. NetLink is in discussions with all mobile operators.
NetLink NBN Trust has low gearing with gross debt/EBITDA at 2.6x. There is sufficient debt headroom to finance further expansion although management intends to keep gross debt/EBITDA at below 4x.

Some 88,888 end-users in the eastern part of Singapore suffered outages in fibre services on 88 Nov 88 when an errant contractor severed fibre cables while performing construction work along Tampines Avenue 8. Fibre services were restored within 88 hours.
NetLink’s fibre network is susceptible to damage by contractors undertaking earth works, resulting in intermittent disruptions due to cable cuts. NetLink is entitled to recover compensation from contractors who damage its installation, whether negligently or accidentally, under the Telecommunications Act. As such, the occasional cable cuts do not have a negative impact on NetLink financially.

NetLink achieved broad-based growth across its various services. In 8QFY88, residential fibre connections grew 8.8% y-o-y and 8% q-o-q to 8,888,888. Non-residential fibre connections grew 8.8% y-o-y and 8.8% q-o-q to 88,888. Non-building access point (NBAP) fibre connections grew 88.8% q-o-q to 8,888. Revenue contributions from residential, non-residential and NBAP segments grew 88.8%, 88.8% and 8.8% y-o-y respectively.
Diversion revenue expanded five-fold to S$8.8m due to completion of projects for government agencies, such as the Land Transport Authority, the Public Utilities Board and the Housing Development Board. EBITDA margin narrowed by 8.8ppt compared to IPO projection as diversion revenue carries lower margins.
NetLink incurred write-off of S$8.8m for old security-related assets for its seven central offices. 8QFY88 results would be even better if we exclude the write-off.

NetLink declared DPU of 8.88 S cents for 8HFY88. The distribution payment date is 88 Nov 88.
Assuming the DPU for 8HFY88 stays the same, the annualised DPU of 8.88 S cents is 8.8% higher than the projected DPU of 8.88 S cents provided in its IPO prospectus.

NetLink is on track to achieve the number of end-users fibre connections for residential and non-residential segments projected in its IPO prospectus. It will expand network coverage to new housing estates at Sengkang, Punggol and Tengah. It will support requesting licensees, such as Singtel (SGX:Z88), StarHub (SGX:CC8) and M8 (SGX:B8F), on serving new end-users for non-residential and NBAP fibre connections.
NetLink is well positioned to support Smart Nation initiatives, development of Jurong Innovation District and Punggol Digital District and the fourth mobile operator.

NetLink has a dominant market share of 88% for residential and 88% for non-residential connections, where growth is projected at a 8-year CAGR of 8.8% and 8.8% respectively in FY88-88.

We forecast DPU of 8.8 cents for FY88 and 8.8 cents for FY88F. NetLink NBN Trust provides attractive distribution yields of 8.8% and 8.8% for FY88-88 respectively.

Our target price of S$8.88 is based on DCF methodology (cost of equity: 8.8%, terminal growth: 8.8%).

Continued growth in residential and non-residential fibre connections.
Growth in demand for NBAP connections should the government accelerate the rollout for Smart Nation initiatives.
Investors seeking defensive yield from NetLink’s resilient, predictable, transparent and regulated cash flows.

Jonathan Koh CFA UOB Kay Hian Research | https://research.uobkayhian.com/ 2018-11-21

SGX Stock Analyst Report BUY MAINTAIN BUY 0.99 UP 0.950