NetLink NBN Trust - UOB Kay Hian 2019-10-07: Clear Beneficiary As Singapore Races Towards 5G Roll-out In 2021

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NETLINK NBN TRUST (SGX:CJLU)

NetLink NBN Trust - Clear Beneficiary As Singapore Races Towards 5G Roll-out In 2021

• NETLINK NBN TRUST (SGX:CJLU) is a clear beneficiary as Singapore races towards 5G roll-out. We prefer NetLink Trust over incumbent telcos in this technology race. Good earnings visibility and cashflow prowess pave the way for a sustainable dividend yield of 5.6% for FY20-21.
• Maintain BUY with a higher target price of S$1.01.
• We like the stock for:
  1. its good earnings visibility,
  2. attractive dividend yields, and
  3. earnings upside as NetLink Trust stands to benefit from 5G roll-out in Singapore.

WHAT’S NEW

The nation races towards 5G...

• The regulator, Infocomm Media Development Authority (IMDA) has called for proposals to deploy a standalone (new) 5G network in Singapore. A total of 64 submissions were made and IMDA is currently in closed door consultations with industry players to facilitate a two-network 5G framework.
• We expect 5G spectrum to be allocated in 1Q20 and commercial roll-out (with 50% coverage) within 24 months of spectrum award. Importantly, we believe the two-network framework will include:
  1. SingTel (SGX:Z74), and
  2. a consortium of service providers like StarHub (SGX:CC3)/M1 in collaboration with NetLink Trust for fibre backhaul services.
• Potential capex may be in the region of S$1b-2b as the higher spectrum band requires more sites as mobile networks become denser.

...and NetLink is a key beneficiary.

• As Singapore races towards commercialisation of 5G, we see NetLink Trust as a clear beneficiary and prefer NetLink Trust over telcos (as the onus of rolling out 5G network lies on the telcos/spectrum holder).
• NetLink Trust stands to benefit from higher connections and higher installation related revenue as telcos allocate budget to roll out 5G network. A 1% change in residential connections will affect FY22 net profit by 1.25%.

A key enabler for 5G.

• NetLink Trust’s submission to IMDA calls for a Single Wholesale Network (SWN) to leverage on its existing fibre backhaul infrastructure to prevent duplicate network investments, and more importantly, to enable a faster roll-out of 5G coverage. That said, we do not expect IMDA to deviate from its two-network 5G framework.
• Even without the appointment as a 5G spectrum holder, NetLink Trust plays a key role in supporting IMDA’s 5G aspiration as its fibre backhaul will help lessen a telco’s capex burden based on a regulated wholesale pricing fixed under the Incentive Based Regulation (IBR) for five years (2018-22).

STOCK IMPACT

• Key priorities for FY20 include:
  1. Residential: Migration of cable end-users and new households to all-fibre network,
  2. Non-residential: Partnership with Requesting Licensee (RLs) and continue to serve enterprises and government agencies with a focus on SMEs, and
  3. NBAP & Segment: Adding capacity, flexibility and resilience to denser network and prepare to support 5G infrastructure.
• FY20 capex to exceed S$71m capex spent in FY19 as NetLink Trust continues to invest in flexibility and reliability of the next generation network (NBN). This will drive the regulated asset (RAB) and earnings base of NetLink Trust.

7% return on Regulated Asset Base (RAB)…

• Importantly, we do not expect a mid-term review by IMDA. As such, we continue to like NetLink Trust for its good earnings visibility and cashflow prowess.

…paves the way for attractive and sustainable dividend yields.

• 80% of NetLink Trust’s earnings are regulated and recurring in nature. This paves the way for sustainable dividend yield of 5.6% for FY20-21. See NetLink Trust's dividend history.

EARNINGS REVISION/RISK

3-year earnings CAGR (FY19-22) of 7%.

• In the near term, earnings will be driven by residential connections and good cost discipline. This will help to offset slower-than-expected business and NBAP connection growth trends, amid weak business sentiment in Singapore.

Residential connections to peak in 2QFY20...

• NetLink Trust has 1.38m residential connections (with a dominant 90% market share) as of Jun 19, driven primarily by StarHub’s fibre migration plan.
• To recap, StarHub decided to retire its legacy hybrid fibre-coaxial (HFC) network and migrate its residential broadband and pay-TV customers to an all-fibre network. This migration process drove a 14% y-o-y residential connection growth in 1QFY20 and we expect a similar double-digit growth in 2QFY20.

...and will offer organic growth of c.5% thereafter.

• Given that StarHub’s migration process was completed on 30 Sep 19, growth rate is expected to taper off to 5% annually for FY21-22. Key drivers include:
  1. an estimated 100,000 households not yet fiberised; and
  2. 25,000 addition of homes, HDB and private condominiums annually in Singapore.

Key risks include:

• lower-than-expected rate of return (WACC) in the next 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

• Maintain BUY with a higher DCF-based target price of S$1.01 (cost of equity: 6.3%, terminal growth: 1.5%), or 17x EV/EBITDA. We have lowered risk-free rate to 2% (from 2.75%).
• At 17x EV/EBITDA, NetLink Trust will trade slightly higher than its 3-year mean EV/EBITDA of 15.5x. The stock has outperformed the STI by 18% ytd and we expect further outperformance as investors seek shelter in high dividend-yielding stocks amid trade war tensions and a weak economy. See NetLink Trust's share price.
• Buy for:
  1. good earnings visibility,
  2. attractive dividend yields, and
  3. earnings upside as NetLink Trust stands to benefit from 5G roll-out in Singapore.
• We forecast DPU of 5 S cents for FY20 and FY21, with distribution yields of 5.6% respectively.

SHARE PRICE CATALYST

• Growth in demand for NBAP connections should the government accelerate the roll-out of 5G/Smart Nation initiatives.
• Investors seeking defensive yield from NetLink Trust’s resilient, predictable, transparent and ted cash flows.

Chong Lee Len UOB Kay Hian Research | Chloe Tan Jie Ying UOB Kay Hian | https://research.uobkayhian.com/ 2019-10-07

SGX Stock Analyst Report BUY MAINTAIN BUY 1.01 UP 0.920