NetLink NBN Trust - DBS Research 2019-11-04: Rally To Continue On Good Results


NetLink NBN Trust - Rally To Continue On Good Results

  • NetLink Trust's 2QFY20 results in line with expectations; 1HFY20 DPU of 2.52 Scts (+3.3% y-o-y) vs. our 2.48-Sct forecast.
  • Residential fibre connections at 1.41m (+2% q-o-q) were ahead, 94% fibre penetration and 2% annual growth in households imply some room for growth.
  • Maintain BUY with higher Target Price of S$1.04.

Netlink NBN Trust (NLT) continues to offer attractive yields.

  • NETLINK NBN TRUST (SGX:CJLU) is trading at c.5.8% FY20F yield, versus an average yield of 5.0 % offered by large-cap industrial S-REITs. We argue that NetLink Trust should trade at a lower yield than S-REITs as
    1. NetLink Trust’s asset life is much longer than S-REITS as it incurs annual capex of S$55m- 60m to replenish its regulated asset base (RAB);
    2. NetLink Trust’s gearing is less than half of S-REITs’ with an ample debt headroom to fund future growth; and
    3. NetLink Trust’s distributions are largely independent of the economic cycle due to the regulated nature of its business.

2Q20 results in line with expectations, higher DPU declared y-o-y.

  • NetLink Trust's 2Q20’s revenue and NPAT of S$94.1m and S$23.2m were up 4% y-o-y/2% q-o-q and 24% y-o-y/11% q-o-q respectively, in line with expectations. See NetLink Trust Announcements; NetLink Trust Latest News.
  • Broad-based revenue growth, especially higher residential connections and installation-related revenue, offset lower diversion revenue. EBITDA margin improved to 73.0% (2Q19: 72.3%) as expenses were down 3% y-o-y/1% q-o-q.
  • DPU of 2.52 Scts has been declared for 1HFY20 (1HFY19: 2.44 Scts). See NetLink Trust Dividend History.

Residential fibre connections continue to grow strongly.

  • As of 30 September 2019, NetLink Trust’s residential connections grew 2.0% q-o-q to reach 1.411m connections, tracking well ahead of expectations of 1.39m connections. StarHub (SGX:CC3)’s cable migration constitutes a big portion of this q-o-q connection growth and the company has since postponed the shutdown of its cable network till 3QCY19.

Non-residential fibre and NBAP connections largely flat for the quarter.

  • On the other hand, non-residential fibre connections grew 0.4% q-o-q, while NBAP connections and segment connections increased 4.3% and 9.4% q-o-q respectively.

Maintain BUY, higher Target Price of S$1.04.

  • Our DCF valuation assumes 5.5% WACC and 1.2% terminal growth based on long-term household formation rate. Our change in Target Price is on the back of higher revenue translating into +4%+5% FY20F/21F earnngs revision and lower WACC (5.7% previously) to factor in the reduced cost of debt. See NetLink Trust Share Price; NetLink Trust Target Price.

Where we differ:

  • We believe that NetLink Trust's share price will continue to perform well amidst a low interest rate environment.
  • NetLink Trust's one unique advantage over REITs is that any rise in the cost of capital in the medium term, might lead to higher regulated returns (versus 7% now) from 2022 onwards, translating into higher distributions.

Sachin MITTAL DBS Group Research | Rui Wen LIM DBS Research | https://www.dbsvickers.com/ 2019-11-04
SGX Stock Analyst Report BUY MAINTAIN BUY 1.04 UP 0.950