NetLink NBN Trust 1QFY20 - UOB Kay Hian 2019-08-06: Within Expectations; Acceleration In Residential Fibre Connections

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NETLINK NBN TRUST (SGX:CJLU)

NetLink NBN Trust 1QFY20 - Within Expectations; Acceleration In Residential Fibre Connections

• NETLINK NBN TRUST (SGX:CJLU)'s 1QFY20 net profit grew 10% y-o-y to S$21m, within expectations, on the back of robust residential connections (+14% y-o-y, +4% q-o-q) and higher installation-related revenue.
• We like NetLink Trust for its defensive earnings (high barriers of entry with 90% of earnings recurring in nature) and as a potential beneficiary of TPG’s mobile coverage expansion.
• Seek shelter in this high yielding stock. Maintain BUY and DCF-based target price of S$0.92.

1QFY20 RESULTS

Within expectations.

• NetLink Trust delivered revenue of S$92m (+7% y-o-y) and net profit of S$21m (+10% y-o-y) for 1QFY20. Results are within expectations, accounting for 26% of our full-year net profit forecast of S$81m.
• The strong earnings were driven by higher residential connections and installation-related revenue and partly offset by lower ducts and manholes services (-18% y-o-y) and diversion revenue (-33% y-o-y).

Residential: Acceleration in migration to fibre.

• NetLink Trust continues to benefit from the migration of StarHub (SGX:CC3)’s customers to an all fibre-network and the expansion of network coverage into new housing estates. Consequently, NetLink Trust experienced a 14% y-o-y and 4% q-o-q growth in residential fibre connections to 1.383m as of 30 Jun 19.
• Revenue contribution from the residential segment grew 12% y-o-y and 4% q-o-q.

Non-residential: Stable base.

• Non-residential fibre connections expanded 4% y-o-y and 1% q-o-q to 46,548. Revenue contribution from this segment grew 5% y-o-y and 1% q-o-q.
• We believe the slower growth was due to weak business sentiment.

Non-building access point (NBAP) connections contracted 5% q-o-q,

• Non-building access point (NBAP) connections contracted 5% q-o-q to 1,505 amid the review of the Smart Nation Sensor Platform programme. Revenue contribution from this segment dropped 3% q-o-q but increased 6% y-o-y.

Recovery in installation and diversion income in 1QFY20.

• Installation and diversion revenue recovered in this quarter. The higher installation revenue (accounting for 8% of 1QFY20 group revenue) was driven by higher residential installation-related revenue and service activation charges as StarHub migrates its coaxial cable customers to an all-fibre network.

EBITDA margin rose 1.5 ppt y-o-y and 0.8ppt q-o-q

• EBITDA margin rose 1.5 ppt y-o-y and 0.8ppt q-o-q to 72.3% in 1QFY20. This is due to:
  1. economies of scale; and
  2. impact from the adoption of SFRS 16 (from 1 Apr 19).
• Excluding the impact of SFRS 16, EBITDA margin would have been 71.5%, or 0.7ppt higher y-o-y.

STOCK IMPACT

Key priorities for FY20.

• Residential: Growing residential fibre connections given the migration of StarHub’s cable users and opportunities in new households.
• Non-residential: Enhancing partnerships with requesting licensees (RLs) and serving the enterprises and government agencies.
• NBAP: Adding capacity, flexibility and resilience to denser network and prepare to support 5G infrastructure.

Healthy balance sheet.

• Gross debt/EBITDA is 2.5x while EBITDA interest coverage is adequately high at 13.5x. Management guides sufficient headroom to finance further expansion with its stable capital structure.
• Distributions by NetLink Trust are on a semi-annual basis. Thus, there is no distribution in 1QFY20.

EARNINGS REVISION/RISK

• 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.
• We forecast DPU of 4.99 cents for FY20 and 5.02 cents for FY21, with dividend yields of 5.7% for both financial years.

VALUATION/RECOMMENDATION

• Maintain BUY and DCF-based target price of S$0.92 (cost of equity: 6.5%, terminal growth: 1.8%). At our target price, the stock trades at 16x EV/EBITDA. Yield would be compressed to 5.4%.

SHARE PRICE CATALYST

• 5G opportunities. Management actively monitors the development of the 5G network in Singapore and explores opportunities associated with the new market development.
• Growth in demand for NBAP connections should the government accelerate the rollout of Smart Nation initiatives.
• Investors seeking defensive yield from NetLink Trust’s resilient, predictable and transparent and regulated cash flows.

Chong Lee Len UOB Kay Hian Research | Chloe Tan Jie Ying UOB Kay Hian | https://research.uobkayhian.com/ 2019-08-06

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