NetLink NBN Trust 2QFY20 - UOB Kay Hian 2019-11-04: In Line; Robust Residential Fiber Connections Drive Earnings Growth

NETLINK NBN TRUST (SGX:CJLU) | SGinvestors.io 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:
    1. its good earnings visibility,
    2. attractive dividend yields, and
    3. earnings upside as NetLink Trust stands to benefit from 5G roll-out.



NetLink NBN Trust 2QFY20 Results


Within expectations.


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:
    1. economies of scale,
    2. SFRS 16 impact – effective 1 Apr 19, and
    3. 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:
    1. an estimated 100,000 households not yet fiberized, and
    2. 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



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 | Chloe Tan Jie Ying UOB Kay Hian | https://research.uobkayhian.com/ 2019-11-04
SGX Stock Analyst Report BUY MAINTAIN BUY 1.010 SAME 1.010



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