NetLink NBN Trust - Phillip Securities 2019-11-04: Organic Growth From Here

NETLINK NBN TRUST (SGX:CJLU) | SGinvestors.io NETLINK NBN TRUST (SGX:CJLU)

NetLink NBN Trust - Organic Growth From Here

  • NetLink Trust (SGX:CJLU)'s 2Q20 results were within expectations, residential fibre connections rose 13.7 y-o-y. See NetLink Trust Announcements.
  • NBAP and segment connections increased by 4.3% and 9.4% q-o-q respectively.
  • NetLink Trust is supporting M1 and TPG Telecom on their 5G trials in Marina Square and Singapore Science Park I and II.
  • Maintained ACCUMULATE with a higher Target Price of S$0.99. We adjusted our WACC downwards to 5.9% to reflect the lower interest rate environment.



The Positives


Residential connections grew healthily.

  • The number of residential connections grew by 1.9% q-o-q (+13.7% y-o-y) to 1.41mn. The growth is partially due to StarHub’s migration of its cable customers to fibre and new household connections.
  • Majority of StarHub’s customers have been migrated and the exercise has ceased. There will no longer be contributions from the migration going forward. As such, we expect connections growth to be lower in 2H20 compared to 1H20. However, there is still modest growth going forward with a run-rate of 25,000 new households each year and possibly two fibre installation in some homes.

NBAP & segments connections regained momentum.

  • Non-Building Address Point (NBAP) and segment connections posted a growth of 4.3% and 9.4% q-o-q respectively. NBAP connections returned to growth after last quarter review of the Smart Nation Sensor Platform programme (SNSP). There is more positive demand coming from smart nation initiatives (Punggol and Jurong digital district), TPG Telecom and 5G.
  • NetLink Trust is supporting M1 and TPG Telecom on their 5G trials in Marina Square and Singapore Science Park I and II. We expect the future roll-out of 5G to boost NBAP connections.


The Negative


Muted non-residential connections growth.

  • Non-residential connections grew 0.4% q-o-q (+2.7 % y-o-y) to 46,742. Recognising that growth is muted, management is closely working with retail service providers to penetrate new customers.
  • NetLink Trust reiterated that the focus for non-residential connections will be in government agencies and small & medium enterprises (SMEs). There are approximately 200,000 SMEs that are currently not using any fixed wired broadband. Non-residential connections account for an average of 8.3% of NetLink Trust’s total revenue.


Outlook

  • The group expects higher revenues from key connections services to be higher in FY20e due to strong residential connections growth and installation-related revenues. CAPEX guidance for FY20e is maintained higher than FY19 due to on-going efforts to densify network, expanding reach to all buildings and investing in street infrastructure for NBAP connections (IoT, sensor deployment and 5G). There is no indication for a mid-term price review, the next review is due in ~ 2 years time.
  • NetLink Trust declared a distribution of 2.52 cents a 3.3% increase y-o-y. The S$98mn distribution is well supported by strong cash-flow from operations of S$135mn. See NetLink Trust Dividend History.
  • NetLink Trust possesses a strong balance sheet with gross debt/EBITDA at 2.4x.


Maintained ACCUMULATE with higher Target Price of S$0.99.

  • We increased our FY21e EBITDA by 1% reflecting the stronger demand for NetLink Trust’s fibre for the 5G roll-out. We adjusted our WACC downwards to 5.9% to reflect the lower interest rate environment. Our valuation is based on DCF (WACC 5.9%, Terminal growth 1%). See NetLink Trust Share Price; NetLink Trust Target Price.
  • NetLink Trust is our favourite pick in the telecommunications sector due to its resilient business model and an attractive distribution yield of 5.6%.





Alvin Chia Phillip Securities Research | https://www.stocksbnb.com/ 2019-11-04
SGX Stock Analyst Report ACCUMULATE MAINTAIN ACCUMULATE 0.99 UP 0.930



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