NetLink NBN Trust - Phillip Securities 2019-07-12: Defensive With An Attractive Yield

NETLINK NBN TRUST (SGX:CJLU)

NetLink NBN Trust - Defensive With An Attractive Yield

NETLINK NBN TRUST (SGX:CJLU)’s dominance in the residential fibre segment allows stable and predictable cash-flows
Expect strong growth in residential connections due to expansion into new estates, and StarHub (SGX:CC3)’s cessation of its cable network and dual connections per household.
5G represents an opportunity for NetLink Trust. NBAP connections could see a boost from the roll-out of more base stations for 5G.
CAPEX guided to be higher in FY20e, which is positive under the RAB model.
Downgrade to ACCUMULATE with an unchanged target price of S$0.93. No changes in our forecasts. The downgrade is due to recent NetLink Trust share price movements. Our valuation is based on DCF (WACC 6%, Terminal growth 1%).

NETLINK NBN TRUST (SGX:CJLU) is the only fibre network with nationwide residential coverage in Singapore. NetLink Trust designs, builds, owns and operates the passive fibre network infrastructure, which includes ducts, manholes, fibre cables and central offices.
As of May 2019, NetLink Trust supports close to 1.33mn residential end-user connections and more than 46,000 non-residential end-user connections and 1,587 Non-Building Address Point (NBAP) across Singapore. NetLink Trust owns more than 16,000 km of ducts, 62,000 manholes, 76,000 km of fibre cables and 33,000sqm of co-location space.

We like NetLink Trust because of its resilient business model and its dominance in the residential fibre end user connection. The recurring base of 1.33mn residential connections allows NetLink Trust to enjoy stable and predictable revenue streams.
NetLink Trust boasts a high EBITDA margin of ~70% which translate to a strong cash-flow to support the S$208mn distributions we forecast in FY20e. Distribution yield at our target price is 5.7%.

We expect higher residential connections as NetLink Trust progressively rolls out its fibre network into new estates such as Punggol, Tengah and Sengkang. New homes built now have four fibre access points to cater to the growing demand for connectivity.
Separate use cases (e.g. gaming) saw some households subscribing to dual broadband connections. We believe the remaining 52,000 customers on StarHub’s Hybrid Fibre Coaxial network should have migrated over to NetLink Trust’s fibre network. We have incorporated a 10% growth in residential connections in FY20e.

A standalone 5G network would require almost double the base stations. The NBAP segment could see a boost stemming from higher demand for fibre connection in the roll-out of 5G base stations. Management shared that they expect positive demand for NBAP connections in FY20e.

NetLink Trust is incentivised under the Regulated Asset Base (RAB) model to increase capital expenditure for the improvement and expansion of its fibre network. CAPEX in FY20e is guided to be higher than FY19 (S$87mn), yearly maintenance CAPEX is approximately S$40-S$60mn per year. These costs can be recovered under the RAB model through price reviews every 5 years.
NetLink Trust has 3 years left before the next review.

Downgrade to ACCUMULATE with an unchanged target price of S$0.93.
There are no changes to our forecasts. The downgrade is due to recent NetLink Trust share price movements. Our valuation is based on DCF (WACC 6%, Terminal growth 1%).

Alvin Chia Phillip Securities Research | https://www.stocksbnb.com/ 2019-07-12

SGX Stock Analyst Report ACCUMULATE DOWNGRADE BUY 0.930 SAME 0.930