NetLink NBN Trust - OCBC Investment 2019-11-04: Trust Not Misplaced


NetLink NBN Trust - Trust Not Misplaced

  • Firm 2QFY20 scorecard.
  • Monetizing 5G.
  • Fair Value of S$1.03.

Robust scorecard

  • NETLINK NBN TRUST (SGX:CJLU)’s 2QFY20 results were broadly in-line, taking into account StarHub (SGX:CC3)’s migration of its coaxial cable subscribers to fibre. Revenue was up 3.8% y-o-y to S$94.1m, mainly due to higher residential connections and installation-related revenue. See NetLink Trust Announcements.
  • We note that staff costs increased substantially by 21.9% y-o-y to S$7.0m, but this was mainly due to lower capitalisation of staff costs as there were fewer spare capacity fibre top up projects completed in 2QFY20. Excluding the impact of SFRS (I) 16, EBITDA margin would have been 72.2%, representing a y-o-y increase of 4.6ppts. PAT rose 24.1% y-o-y to come in at S$23.2m, which represents 27.2% of our full-year forecast.
  • NetLink Trust has declared a DPU of 2.52 S- cents for 1HFY20, which represents a 3.3% y-o-y increase and 50.6% of our full-year forecast. Based on 1 Nov 19’s closing price, this represents an annualized yield of 5.4%. See NetLink Trust Share Price; NetLink Trust Dividend History.

Net beneficiary of 5G

  • In our view, NetLink Trust remains well-positioned to support and benefit from IMDA’s objectives to achieve pervasive deployment of 5G infrastructure and grow the 5G innovation ecosystem. Management clarified that the increase in fibre connections associated with the 5G build-up is likely to show up mainly in the NBAP category.
  • NetLink Trust will be supporting M1 for its 5G trial at an upcoming new restaurant in Marina Square and TPG Telecom for its 5G trial network across Singapore Science Park I and II. Management noted that it is still focused on core fibre connections and ducts and manholes businesses, but will be open to exploring other opportunities.

Not ex-growth

  • Management acknowledged that while growth in the group’s non-residential connections was muted in 2QFY20, opportunities could lie in the SME segment, of which ~200k of them are still not using fixed wired broadband.
  • Management has continued to guide that capex in FY20 is expected to remain higher than FY19; we note that the group has S$48.4m of contracted capex that is yet to be recognised in the financial statements, of which we believe a substantial part should involve work that should be completed in 2HFY20.
  • We continue to believe that higher capex spend in building up its RAB would position NetLink Trust well for the next pricing review. Still, management believes that projected capex is at a manageable level, and that there is no need to increase leverage at this juncture (TTM gross debt/EBITDA of 2.4x; 2QFY20 D/A ratio of 14.9%).
  • Following adjustments to our forecasts as well as the assumption of a 6.6% cost of equity / 1% terminal growth rate, we raise our Fair Value Estimate from S$0.95 to S$1.03. See NetLink Trust Share Price; NetLink Trust Target Price.

OCBC Research Team OCBC Investment Research | https://www.iocbc.com/ 2019-11-04
SGX Stock Analyst Report BUY MAINTAIN BUY 1.03 UP 0.950