NETLINK NBN TRUST (SGX:CJLU)
NetLink NBN Trust 2QFY20 - In Line; Robust Residential Fiber Connections Drive Earnings Growth
- NetLink Trust's 2QFY20 net profit grew 24% y-o-y to S$23m, on the back of robust residential connections (+14% y-o-y, +2% q-o-q) and good cost discipline. We deem results to be within expectations.
- Good earnings visibility and cashflow prowess pave the way for a sustainable dividend yield of 5.3% for FY20-21.
- Maintain BUY with a target price of S$1.01.
- We like the stock for:
- its good earnings visibility,
- attractive dividend yields, and
- earnings upside as NetLink Trust stands to benefit from 5G roll-out.
NetLink NBN Trust 2QFY20 Results
Within expectations.
- NETLINK NBN TRUST (SGX:CJLU) reported 2QFY20 revenue and net profit of S$94m (+4% y-o-y) and S$23m (+24% y-o-y) respectively. This was supported by strong growth in residential connections (+14% y-o-y) and good cost discipline. See NetLink Trust Announcements; NetLink Trust Latest News.
- We deem the results to be within expectations, accounting for 55% of our FY20 net profit forecast of S$81m.
1HFY20 DPU of 2.52 S cents
- NetLink Trust declared a 1HFY20 DPU of 2.52 S cents (book closure: 14 Nov 19). We forecast DPU of 5 S cents for FY20 and FY21, translating to an attractive net dividend yield of 5.3% respectively.
Residential: Robust connections growth as StarHub completes fibre migration process.
- NetLink Trust continued to benefit from the migration of StarHub’s customers to an all fibre-network (completed on 30 Sep 19) and the expansion of network coverage into new housing estates. As a result, NetLink Trust’s residential fibre connections surged to 1.411m (+14% y-o-y, +2% q-o-q) in this quarter while revenue contribution from the residential segment grew 14% y-o-y and 3% q-o-q.
Non-residential: Flat growth.
- Non-residential fibre connections expanded 3% y-o-y (flat q-o-q) to 46,742 while revenue contribution from this segment grew 4% y-o-y and 1% q-o-q.
Non-building access point (NBAP) connections grew 23% y-o-y
- Non-building access point (NBAP) connections grew 23% y-o-y and 4% q-o-q to 1,569, while revenue contribution from this segment surged 7% y-o-y and 1% q-o-q. NetLink Trust will continue to support telcos and government agencies on Smart Nation Initiatives.
Good cost management.
- 2QFY20 EBITDA margin rose 5.4ppt y-o-y and 0.7ppt q-o-q to 73% as a result of:
- economies of scale,
- SFRS 16 impact – effective 1 Apr 19, and
- lower installation costs and other operating expenses.
- This was partly offset by higher staff costs incurred in the quarter. Excluding the impact of SFRS 16, EBITDA margin would have been 72.2%, or 4.6ppt higher y-o-y.
STOCK IMPACT
Key priorities for FY20 include
- Residential: Migration of cable end-users and new households to all-fibre network,
- Non-residential: Partnering with Requesting Licensee (RL), and continuing to serve enterprises and government agencies with a focus on SMEs, and
- NBAP & Segment: Adding capacity, flexibility and resilience to denser network and prepare to support 5G infrastructure.
Residential connections to taper off to c.5% annually for FY21-22
- Residential connections to taper off to c.5% annually for FY21-22, given that StarHub’s migration process was completed on 30 Sep 19. Key drivers include:
- an estimated 100,000 households not yet fiberized, and
- 25,000 addition of homes, HDB (Housing Development Board) and private condominiums annually in Singapore.
Strong balance sheet.
- NetLink Trust has low gearing with gross debt/EBITDA at 2.4x while EBITDA interest coverage is adequately high at 13.6x. Management guides sufficient headroom to finance further expansion with its stable capital structure.
EARNINGS REVISION/RISK
- No change to our earnings forecast.
VALUATION/RECOMMENDATION
- Maintain BUY and DCF-based target price of S$1.01 (cost of equity: 6.3%, terminal growth: 1.5%), or 17x EV/EBITDA. At our target price, the stock will trade slightly higher than its 3-year mean EV/EBITDA of 15.5x. See NetLink Trust Share Price; NetLink Trust Target Price.
- The stock offers an attractive net dividend yield of 5.3%. See NetLink Trust Dividend History.
SHARE PRICE CATALYST
A clear beneficiary towards 5G roll-out
- A clear beneficiary towards 5G roll-out on the back of:
- higher connections and higher installation-related revenue, and
- the onus of rolling out 5G network lies on the Mobile Network Operators (MNOs).
- 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 and transparent and regulated cash flows.
Chong Lee Len
UOB Kay Hian Research
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Chloe Tan Jie Ying
UOB Kay Hian
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https://research.uobkayhian.com/
2019-11-04
SGX Stock
Analyst Report
1.010
SAME
1.010
