NetLink NBN Trust - DBS Research 2019-08-06: Supported By Strong Growth In Residential Fibre Connections

NETLINK NBN TRUST (SGX:CJLU)

NetLink NBN Trust - Supported By Strong Growth In Residential Fibre Connections

NETLINK NBN TRUST (NetLink Trust, SGX:CJLU) is trading at c.5.7% FY20F yield, versus an average yield of 5.4% offered by large-cap industrial S-REITs. We argue that NetLink Trust should trade at a lower yield than S-REITs as
- NetLink Trust’s distributions, due to the regulated nature of its business, are largely independent of the economic cycle;
- NetLink Trust’s gearing is less than half of S-REITs’ with an ample debt-headroom to fund future growth; and
- 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 during the next review period from 2022 onwards.

We believe that NetLink Trust’s share price will continue to perform well amidst a lower interest rate environment.
Further, 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.

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.

NetLink Trust's 1Q20 revenue and NPAT of $92m and $21m were +7% y-o-y/+5% q-o-q and +10% y-o-y/+5% q-o-q respectively, in line with expectations. Higher residential connections and installation-related revenue were offset by lower ducts and manhole service and diversion revenue.
EBITDA margin improved to 72.3% (1Q19: 70.8%) as revenue growth outpaced that of expenses which grew 5% y-o-y/3% q-o-q, as well as on the back of SFRS 16 adoption (EBITDA margin would have been 71.5% excluding impact from SFRS 16 adoption).

As of 30 Jun 2019, the number of NetLink Trust’s residential connections had grown 4.1% q-o-q to reach 1.383m, tracking well ahead of expectations.
StarHub cable migration constitutes a big portion of this q-o-q connection growth and has since postponed the shutdown of their cable network till 3QCY19. There are c. 100,000 households in Singapore which are not on a fibre connection.

On the other hand, non-residential fibre connections grew 0.6% q-o-q, while NBAP connections decreased 5.2% q-o-q due to the review of Smart Nation Sensor Platform programme, where c. 100 circuits were terminated under Smart Nation Platform Programme Phase 1.
According to NetLink Trust, non-residential fibre market share remains stable; NBAP terminations are one-off and not representative of broader Smart Nation initiatives. NetLink Trust remains in discussion with various government agencies over other projects.

NetLink Trust continues to monitor 5G network development in Singapore and “will explore opportunities associated with the new market development”. In the meantime, NetLink Trust expects FY20 capex to be higher, as it continues to invest and expand the network.
While working to grow residential connection numbers from new households, residential homes not on fibre and ensuring smooth migration of cable end-users from StarHub to fibre, NetLink Trust continues to focus on growing non-residential connections especially for SMEs, as well as build a denser network and offer new products for its NBAP connections business.

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 cost of equity assumption from 6.4% to 6.1%.

Sachin MITTAL DBS Group Research | Rui Wen LIM DBS Research | https://www.dbsvickers.com/ 2019-08-06

SGX Stock Analyst Report BUY MAINTAIN BUY 0.95 UP 0.900