NetLink NBN Trust - UOB Kay Hian 2019-05-15: FY19 Earnings Beat Management’s Projections

NETLINK NBN TRUST (SGX:CJLU)

NetLink NBN Trust - FY19: Earnings Beat Management’s Projections

NETLINK NBN TRUST (SGX:CJLU)'s 4QFY19 net profit of S$20m exceeds management’s projection by 12% on the back of a 3% q-o-q growth in residential connection and good cost discipline. FY19 net profit rose to S$77.4m, surpassing projection by 18%.
A DPU of 2.44 S cents was declared for the quarter, bringing FY19 DPU to 4.88 S cents, 5% higher than projection.
Maintain BUY as NetLink Trust offers an attractive shelter against external volatility. Target price: S$0.92.

NETLINK NBN TRUST (SGX:CJLU) reported revenue of S$88m (+8.9% y-o-y) and net profit of S$20m (+30.9% y-o-y) for 4QFY19. Net profit was S$77.4m for FY19, which accounted for 105% of our full-year forecast of S$73m. Earnings exceeded management’s projection by 18%, with residential connections driving bottom-line growth.

NetLink Trust conitnues to benefit from the migration of StarHub’s customers to an all fibre-network. Residential fibre connections grew 11% y-o-y and 3.4% q-o-q to 1,328m, surpassing projection by 3.9%. Revenue from the residential segment grew 3.6% q-o-q.

Non-residential fibre connections grew 5% y-o-y and 1% q-o-q to 46,000. Revenue from the non-residential segment grew 0.8% q-o-q. The slower growth could be caused by weak business sentiment as a result of the US-China trade conflict, we opine.

Non-building access point (NBAP) fibre connections grew 8.5% q-o-q to 1,587. Revenue from the segment grew 7.3% q-o-q. NetLink Trust will continue to support telcos and government agencies on Smart Nation initiatives.

Installation and diversion revenue (5% of group revenue) fell 23.8% and 74.4% q-o-q in 4QFY19 respectively. This was due to:
1. some requested licences (RLs) undertaking the installation of their own for NBAP and non-residential connections; and
2. deferred revenue from service activation charges (effective 1 Jan 18) for services that have not yet been performed.

NetLink Trust's 4QFY19 EBITDA margin of 71.7% is ahead of projection due to lower IT maintaince costs, lower professional fees and reversal of over-accruals for opex.

DPU of 2.44 S cents declared for 2HFY19 (book closure: 24 May 19). FY19 DPU stands at 4.88 S cents, 5% higher than the projected DPU. This translates to an attractive net dividend yield of 5.8%.
NetLink Trust's focus for FY20 includes:
- higher revenue driven by higher residential connections and installation-related revenue;
- continuing to invest in expanding the network and utilising the S$10m capex reserves on projects that will improve the network’s capability and resiliency.
Regulated capex will be higher in FY20 as management seeks to improve the network.

We maintain FY20-21 net profit projections of S$80.9m and S$88.8m respectively.
Key drivers include 8% and 5% y-o-y growth in residential connections for FY20-21.

Maintain BUY and DCF-based target price of S$0.92 (cost of equity: 6.5%, terminal growth: 1.8%), or 16.2x EV/EBITDA. Yields would be compressed to 5.4%.

5G opportunities. Management actively monitors the development of the 5G network in Singapore and explores opportunities associated with the new development.
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.

Chong Lee Len UOB Kay Hian Research | Chloe Tan Jie Ying UOB Kay Hian | https://research.uobkayhian.com/ 2019-05-15

SGX Stock Analyst Report BUY MAINTAIN BUY 0.920 SAME 0.920