NETLINK NBN TRUST (SGX:CJLU)
NetLink NBN Trust - Pursuing Steady Residential Fibre Connection Growth
- We expect NetLink to meet our FY19 net profit forecast of S$73m and DPU may exceed IPO projections by 5% at an annualised DPU of 4.88 cents. This translates to attractive net dividend yields of 5.8% and 6.0% for FY19-20 respectively.
- We continue to like the company for defensive earnings (high barriers of entry), stable cash flow (90% of earnings are recurring in nature) and potential beneficiary of TPG’s mobile coverage plan.
- Maintain BUY. Target price: S$0.92.
WHAT’S NEW
Full-year net profit of S$72.9m...
- We expect NETLINK NBN TRUST (SGX:CJLU) to meet our net profit forecast of S$73m for FY19. This is ahead of IPO projection of S$65.7m. To recap, 9MFY19 net profit came in at S$57.3m (+20.1% y-o-y), accounting for 87% of IPO projections.
...with potential 5% y-o-y DPU growth.
- In addition, NetLink had declared DPU of 2.44 S cents for 1HFY19, which was paid on 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 in its IPO prospectus.
Pursuing steady residential growth...
- Key earnings driver include StarHub (SGX:CC3)’s fibre migration plan, and expansion of network coverage into new housing estates. To recap, StarHub decided to migrate its residential broadband and pay-TV customers 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. As a result, NetLink experienced a 10% y-o-y and 4% q-o-q growth in residential fibre connections in 3QFY19.
- As at Dec 18, NetLink had 1,283,800 residential connections (with a dominant 90% market share).
...in new housing estates.
- In addition, NetLink is expanding its network coverage to new housing estates at Sengkang, Punggol and Tengah. It will support telcos to serve new end-users for nonresidential and non-building access point (NBAP) fibre connections.
Weak business sentiment tempers non-residential connection growth.
- We expect growth in non-residential fibre connections to be tempered by weaker business sentiment. In 3QFY19, non-residential fibre connections grew 6% y-o-y to 45,700.
- Management observed that NetLink has maintained its market share of 35%.
STOCK IMPACT
Good earnings visibility with 80% of revenue from RAB model.
- We like NetLink for its strong cash flow prowess.
- Importantly, NetLink charges wholesale pricing regulated under the Regulated Asset Base (RAB) model, which is fixed for five years. The most recent review by IMDA of prices under the Interconnection Offer and Reference Access Offer was completed in May 17 and most of the revised prices will be effective from or around Jan 18 to Dec 22. This accounts for 80% of NetLink’s group revenue in 9MFY19.
Robust fibre infrastructure - The key to unlocking 5G's full potential.
- The underlying foundation of fibre connectivity is key to steer ultrafast speeds of 5G that can support various types of IoT applications in the near future. We believe NetLink could benefit from the potential deployment of fibre for telcos’ 5G network as its assets are deemed future-proofed.
Strong balance sheet.
EARNINGS REVISION/RISK
- We forecast DPU of 4.8 cents for FY19 and 5 cents for FY20, with distribution yields of 5.8% and 6% respectively.
Sheltered from competition.
- High-speed fibre broadband services appear to be a necessity rather than an option as many daily activities now require acccess to the Internet and cloud-based services.
- Furthermore, competition or churn among retail service providers (RSP) does not affect the number of fibre connections provided by NetLink. It is not affected when a fibre broadband subscriber switches from one RSP to another competing RSP. In fact, overall demand for NetLink’s fibre connections could increase if competition reduces the prices charged by RSPs.
Key risks include:
- lower-than-expected rate of return (WACC) in second regulatory period, ie from Jan 23; and
- expansion into unregulated businesses and the potential resultant of lower dividend payouts (to preserve cash flow for future unregulated business expansion).
VALUATION/RECOMMENDATION
- Our target price of S$0.92 is based on DCF methodology (cost of equity: 6.5%, terminal growth: 1.8%). At our target price, the stock will trade at 16.2x EV/EBITDA. Yields would be compressed to 5.4%.
- Maintain BUY.
SHARE PRICE CATALYST
- Continued growth in residential and non-residential fibre connections.
- Growth in demand for NBAP connections should the government accelerate the rollout of Smart Nation initiatives.
- Investors seeking defensive yield from NetLink’s resilient, predictable, transparent and regulated cash flows.
Jonathan KOH CFA
UOB Kay Hian Research
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https://research.uobkayhian.com/
2019-05-07
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