NetLink Trust - Maybank Kim Eng 2018-11-05: Solid 1HFY19. More To Come.


NetLink Trust - Solid 1HFY19. More To Come.

Core business in line. Maintain Buy

  • NetLink’s 1HFY19 (end-Mar) results slightly beat MKE and consensus estimates thanks to unusually strong diversion revenue in the quarter.
  • We maintain our forecasts and DDM based Target Price (COE of 6%, LTG 0%) of SGD0.93.
  • Even without factoring for potential upside from possible accelerated work from StarHub’s (SGX:CC3, BUY, Target Price SGD2.21) cable network decommissioning and possible network sharing initiatives among the telcos, NetLink is already offering healthy upside and a sustainable yield.
  • Any challenge to its current level of regulated returns is the main risk to our outlook.

Diversion revenue was the non-core surprise

  • NetLink Trust's 1HFY19 revenues and reported profit were a slight beat of MKE/consensus at 53%/52% and 54%/54% of FY19E.
  • Diversion revenue was the key surprise in the quarter; it is a relatively volatile contract based on revenue from diverting NetLink Trust’s ducts and equipment for road, rail and other utility works. Core regulated revenues generally ramped up within expectations.
  • Residential fibre connections are now at 83% of households from 80% at end of FY18 and our forecast of 85% by year-end.

Short term upside potential – all about timing

  • With StarHub announcing the closure of its cable network by Jul 2019 and migration of its broadband subscribers to fibre, where NetLink is the defacto provider, our current forecast of 95% residential fibre household penetration by FY21E could happen sooner.
  • A FY20E time line would provide 7%/6% upside to our FY20E/21E profit forecasts.

Long-term potential – scenarios are lining up

  • Aside from the 5G champion scenario we outlined in our initiation note (see NetLink Trust: Safety First | SGinvestors.io), Netlink is exploring its potential in telco network sharing discussions. Its relatively low gearing is meant to keep the powder dry for potential capex under its guaranteed return businesses.
  • On the flipside, we believe if capex remains low, there could be a special distribution towards the end of the current review period in FY22E.

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 Trust and similar stocks in the same asset class.

Luis Hilado Maybank Kim Eng Research | https://www.maybank-ke.com.sg/ 2018-11-05
SGX Stock Analyst Report BUY MAINTAIN BUY 0.930 SAME 0.930