NetLink NBN Trust - DBS Research 2019-05-14: Capex Boost To Accelerate Long-Term Growth

NETLINK NBN TRUST (SGX:CJLU)

NetLink NBN Trust - Capex Boost To Accelerate Long-Term Growth

NetLink Trust's 4Q19 results exceed IPO projections, in line with our above consensus forecast.
Stock continues to offer attractive yield of c.6.0%.
DPU of 4.88 Scts is 5.2% higher than IPO projection. See NetLink Trust's dividend history.
Maintain BUY with higher Target Price of S$0.90.

NETLINK NBN TRUST (SGX:CJLU) is trading at c.6.0% FY20F yield, versus an average yield of 5.7%- 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 (RAB).
Higher than expected FY20F capex funded via capex reserve and debt is a positive step to boost the regulated asset base which will be factored in the next review period from 2022 onwards.

Market continues to search for high yields as interest rates outlook is flattish. 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 any 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.

FY19F-20F to benefit from StarHub (SGX:CC3)’s accelerated migration to fibre,
NetLink Trust could use its debt headroom to invest in Smart Nation initiatives, not factored into our Target Price, and
clarity on NetLink Trust’s potential role in 5G rollout.

Maintain BUY, higher Target Price of S$0.90. Our DCF valuation assumes 6% WACC and 1.2% terminal growth based on long-term household formation rate.
Our change in Target Price was on the back of change in beta assumption from 0.60 to 0.55 to better reflect the stock’s beta.

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 (ICO) pricing.

NetLink Trust's 4Q19 NPAT was higher than IPO projections and in line with our forecast. 4Q19’s reported revenue and net profit of S$87.9m and S$20.0m were 0.5%/11.7% higher than IPO projections. Higher revenues from residential connections and ducts and manhole services were buffered by lower installation-related revenue.
EBITDA margin of 71.5% for the quarter was in line with IPO projections. Against lower operating expenses and finance costs, net profit came in higher than IPO projections, in line with ours.

As of 31 Mar 2019, NetLink Trust had 1.328m residential connections, 46.2k non-residential connections, 1,587 (Non-Building Address Point) NBAP connections. NBAP connections continue to track projections of 1,592 connections by Mar 2019, while non-residential connections were slightly below 47k connections expected.
Residential connections have surpassed the full year IPO projection by 3.9% for FY2019, attributed to StarHub’s cable migration to fibre networks by July 2019. NetLink Trust continues to work with StarHub to facilitate StarHub users’ migration to fibre.

In 4Q19, NetLink Trust declared 2.44 Scts DPU, bringing the total DPU declared to 4.88 Scts for FY2019, 5.2% higher than IPO projections. See NetLink Trust's dividend history.

As NetLink Trust expects revenue from key connection services to be higher on the back of higher residential connections and installation-related revenues, NetLink Trust continues to expand its network and will utilise the Capex Reserve on projects to improve the network’s capability and resiliency.
NetLink Trust is also guiding for capex to exceed S$87m in FY20F versus our previous projection of S$57m. Besides, utilising an annual capex reserve of S$8m, NetLink Trust is also open to fund capex via debt. NetLink Trust will seek the benefit of a higher regulated asset base in the next period from FY20F onwards.
NetLink Trust also continues to work with Requesting Licensees to acquire new corporate non-residential and NBAP customers.

As mentioned in previous quarters, NetLink Trust will monitor the development of the 5G network and 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.

Sachin MITTAL DBS Group Research | Rui Wen LIM DBS Research | https://www.dbsvickers.com/ 2019-05-14

SGX Stock Analyst Report BUY MAINTAIN BUY 0.90 UP 0.870