NetLink NBN Trust - UOB Kay Hian 2019-02-15: 3QFY19 Moderation In Growth For Non-Residential

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NETLINK NBN TRUST (SGX:CJLU)

NetLink NBN Trust - 3QFY19: Moderation In Growth For Non-Residential

• Residential fibre connections grew by a healthy 10.2% y-o-y and 3.5% q-o-q due to accelerated migration to fibre for broadband and pay-TV.
• NetLink NBN Trust is the most defensive stock listed on the SGX as it:
  1. has low volatility but high liquidity;
  2. caters to basic necessities;
  3. has stable, recurrent and regulated revenue streams;
  4. is a beneficiary of higher domestic interest rates;
  5. is protected by high barriers to entry; and
  6. has a blue-chip customer base.
• Maintain BUY. Target price: S$0.92.

3QFY19 RESULTS

Slightly below expectations.

• NETLINK NBN TRUST (SGX:CJLU) reported revenue of S$89m (+6.7% y-o-y) and net profit of S$19.6m (-9.4% y-o-y) for 3QFY19. Net profit was S$57.3m for 9MFY19, which accounted for 68.5% of our full-year forecast.

Residential: Acceleration in migration to fibre.

• STARHUB LTD (SGX:CC3) decided to migrate its customers of both residential broadband and pay-TV to an all-fibre network. It plans to cease provision of cable services after 30 Jun 19 and retire its legacy hybrid fibre-coaxial (HFC) network. Residential fibre connections grew 10.2% y-o-y and 3.5% q-o-q to 1,283,800, which is already higher than the projection provided in its IPO prospectus.
• Revenue contribution from the residential segment grew 2.4% q-o-q.

Non-residential: Slower expansion.

• Non-residential fibre connections grew 5.8% y-o-y and 0.4% q-o-q to 45,700.
• Revenue contributions from non-residential segment grew 1.1% q-o-q. The slower growth could be caused by weak business sentiment as a result of trade conflict. Management observed that NetLink has maintained its market share of 35%.

NBAP: Huge growth but small base.

• Non-building access point (NBAP) fibre connections grew 130.2% y-o-y and 14.2% q-o-q to 1,462. Revenue contributions from NBAP segment grew 1.5% q-o-q. NetLink will continue to support telcos and government agencies on Smart Nation initiatives.

Normalisation of EBITDA margin.

• Installation and diversion revenue increased 96.5% and 169.7% y-o-y respectively. There were also corresponding increases in installation and diversion costs by 26.4% and 227% y-o-y.
• On a sequential basis, diversion revenue, which is less predictable, declined 68% q-o-q. EBITDA margin recovered 3ppt q-o-q to 70.6% as conversion jobs fetch lower margins.

STOCK IMPACT

On track to meet IPO projection.

• NetLink had previously declared DPU of 2.44 S cents for 1HFY19. The distribution payment date is 27 Nov 18. Assuming the DPU for 2HFY19 stays the same, the annualised DPU of 4.88 S cents is 5.2% higher than the projected DPU of 4.64 S cents provided in its IPO prospectus.
• Distributions by NetLink are made on a semi-annual basis. Thus, there is no distribution pertaining to 3QFY19.

Pursuing steady growth.

• NetLink will expand network coverage to new housing estates at Sengkang, Punggol and Tengah. It will support telcos to serve 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.

Opportunities related to 5G and network sharing.

• Management is closely monitoring developments on the roll-out of 5G networks in Singapore. NetLink could support the deployment of fibre for telcos’ 5G networks. 5G requires more fibre connections for fronthaul and backhaul networks.
• NetLink is open to making investment to support network sharing among the four mobile operators.

Strong balance sheet.

• NetLink has low gearing with gross debt/EBITDA at 2.6x while EBITDA interest coverage is high at 13.5x.
• There is sufficient debt headroom of S$350m to finance further expansion, assuming NetLink keeps within threshold of 4x for gross debt/EBITDA.

EARNINGS REVISION/RISK

• Our previous forecast was too optimistic. We have thus trimmed FY19 DPU by 5% due to slower growth from the non-residential segment.

VALUATION/RECOMMENDATION

• Our target price of S$0.92 for NetLink NBN Trust is based on DCF methodology (cost of equity: 6.5%, terminal growth: 1.8%). Maintain BUY.

SHARE PRICE CATALYST

• Continued growth for 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 NBN Trust’s resilient, predictable, transparent and regulated cash flows.

Jonathan KOH CFA UOB Kay Hian Research | https://research.uobkayhian.com/ 2019-02-15

SGX Stock Analyst Report BUY MAINTAIN BUY 0.92 DOWN 0.990