NetLink NBN Trust - DBS Research 2019-02-14: Stock In Play As Investors Search For High Yields


NetLink NBN Trust - Stock In Play As Investors Search For High Yields

  • NetLink Trust’s 3QFY19 results exceed IPO forecasts and are inline withour forecasts.
  • Next few quarters to benefit from StarHub’s accelerated migration to fibre.
  • Stock offers attractive dividend yield of c.6.3% forFY20F.
  • Maintain BUY, Target Price S$0.87.

Netlink (NLT) should trade at lower yield than industrial S-REITS.

  • NETLINK NBN TRUST (SGX:CJLU) is trading at c.6.3% FY20F yield, versus an average yield of 6.0% offered by large-cap industrial S-REITs. We argue that NetLink Trust should trade at a lower yield than S-REITs as
    1. NetLink Trust’s distributions, due to the regulated nature of its business, are largely independent of the economic cycle;
    2. NetLink Trust’s gearing is less than half of S-REITs’ with an ample debt-headroom to fund future growth; and
    3. NetLink Trust’s asset life is much longer than S- REITs as NetLink Trust incurs annual capex to replenish its regulated asset base.

Where We Differ:

  • Market continues to search for high yields as Fed turns more dovish. This contrasts with previous concerns on higher than expected 10-year bond yields. NetLink Trust’s one unique advantage over REITs and Business Trusts is that a potential rise in the cost of capital might lead to higher regulated returns from 2022 onwards, translating into higher distributions.
  • NetLink Trust has also hedged its interest rates till March 2021 and growth in distributions should translate into higher yields.

Potential Catalysts:

  • FY19F-20F to benefit from StarHub’s accelerated migration to fibre,
  • NetLink Trust could use its debt headroom to invest in Smart Nation initiatives, which we have not factored into our target price, and
  • More clarity on 5G rollout and NetLink Trust’s potential participation.


  • Maintain BUY, Target Price unchanged at S$0.87. Our DCF valuation assumes 6% WACC and 1.2% terminal growth based on long-term household formation rate.

Key Risks to Our View:

  • Key risks to our view will be regulatory changes in 2022. As ~80% of the revenue is regulated under the RAB model, any changes in nominal pre-tax WACC from 2022 onwards may lead to changes in Interconnection Offer pricing.

WHAT’S NEW - 3Q19 results exceeds IPO forecast

Revenues and NPAT higher than IPO projections and in line with our forecast.

  • NetLink Trust’s 3Q19’s revenue of S$89.0m and NPAT of S$19.6m was 3.4% and 17.6% higher than IPO projections. Higher than projected revenues from diversion, ducts and manhole service was offset by lower than projected installation-related revenues, similar to 2Q19.
  • Higher than projected revenues outpaced relatively flat costs in the quarter. NetLink Trust is on track to meet our full year forecast for FY19.

EBITDA margin in line.

  • EBITDA margin of 70.6% was in line with projected EBITDA margin of 70.4% for the quarter.

Residential fibre connections ahead of full year IPO projection.

  • As of 31 Dec 2018, NetLink Trust had 1.284m residential connections, 45.7k non-residential connections, 1,462 (Non-Building Address Point) NBAP connections. While non-residential and NBAP connections continue to remain on track to achieve its projections of 47.3k and 1,592 connections by Mar 2019, residential connections have surpassed the full year IPO projection by 3.4% as of 3Q19, which is attributed to STARHUB LTD (SGX:CC3)’s cable migration to fibre networks by July 2019.
  • NetLink Trust continues to work with StarHub to facilitate StarHub users’ migration to fibre.

Continuous growth in residential and non-residential connections.

  • Should residential connections continue to grow faster than expectations, this could potentially add to revenue growth expectations in upcoming quarters.
  • In the meantime, NetLink Trust continues to build on its network in new housing estates as well as support Requesting Licensee’s efforts in customer acquisitions efforts for non-residential customers.

Continues to monitor 5G network deployment.

  • NetLink Trust continues to explore opportunities in the 5G space as it believes that 5G will require a lot of fibres in its front haul and back haul connectivity to base stations.
  • At the present stage, while the timing of 5G introduction in Singapore is not determined as yet, NetLink Trust believes that there is little substitution risk for fixed broadband even as 5G becomes deployed, as users consume broadband fibre network heavily as it provides more bandwidth.

Sachin MITTAL DBS Group Research | Rui Wen LIM DBS Research | https://www.dbsvickers.com/ 2019-02-14
SGX Stock Analyst Report BUY MAINTAIN BUY 0.870 SAME 0.870