NetLink NBN Trust - Phillip Securities 2019-12-16: A Key Player In The 5G Roll-out

NETLINK NBN TRUST (SGX:CJLU)

NetLink NBN Trust - A Key Player In The 5G Roll-out

Countercyclical due to resilient business model and dominance in residential connections.
Expect run-rate growth of 25,000 residential fibre connections per annum.
NetLink Trust is a beneficiary of the 5G roll-out, NBAP could see a boost in the number of connections.
5G unlikely to make NetLink Trust redundant, NetLink Trust infrastructure can accommodate higher speeds.

NETLINK NBN TRUST (SGX:CJLU) is the only fibre network with nationwide residential coverage in Singapore. NetLink Trust designs, builds, owns and operates the passive fibre network infrastructure, which includes ducts, manholes, fibre cables and central offices.
As of May 2019, NetLink Trust supports close to 1.33mn residential end-user connections and more than 46,000 non-residential end-user connections and 1,587 Non-Building Address Point (NBAP) across Singapore.
NetLink Trust owns more than 16,000 km of ducts, 62,000 manholes, 76,000 km of fibre cables and 33,000sqm of co-location space.
See NetLink Trust Share Price; NetLink Trust Dividend History; NetLink Trust Announcements; NetLink Trust Latest News.

NetLink Trust’s resilient business model and dominance in the residential fibre end-user connection of 1.41mn allows it to enjoy stable and predictable revenue streams.
NetLink Trust boasts a strong EBITDA margin of ~70% which translate to a steady cash-flow to support the S$208mn distributions we forecast in FY20e. Distribution yield at our target price is 5.7%.

The number of residential connections grew by 1.9% q-o-q (+13.7% y-o-y). The growth is largely due to StarHub (SGX:CC3)’s migration of its cable customers to NetLink Trust’s fibre. 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 fibre connections growth to be lower in 2H20e compared to 1H20.
There is still modest growth stemming from 25,000 new households a year in Singapore.

The Infocomm Media Development Authority (IMDA) launched a Call for Proposal (CFP) to facilitate the roll-out of 5G mobile network which is slated to cover half of Singapore by end-2020. NetLink Trust recently announced that they are supporting TPG Telecom on 5G trials in Singapore Science Park.
We expect the roll-out of 5G to benefit the growth of NetLink Trust’s NBAP connections especially when there is going to be two nationwide networks on a Standalone basis. Mobile Network Operators (MNOs) are likely to engage NetLink Trust’s extensive fibre infrastructure to lighten their CAPEX. These fibre connections will be used in the MNOs base stations.
After factoring that half of Singapore will have to be 5G covered by 2020, we modelled a 36% growth in NBAP connections bringing the total number of NBAP connections to 2,263.

Although 5G speeds can be faster than fixed fibre we do not see a replacement threat in the short to medium term. The amount of data consumed per household is considerable given that several devices will be connected onto fixed broadband. 5G will be too expensive to use solely for one's connectivity needs.
NetLink Trust’s fibre infrastructure can also accommodate speeds of 1GBps and higher should the telcos choose to upgrade their equipment. We also suspect that in the early stages of 5G implementation, the mobile network will not be able to take the capacity if we would migrate all our connectivity needs from fixed to wireless.

Maintain ACCUMULATE with an unchanged target price of S$0.99. There are no changes to our forecasts. Our valuation is based on DCF (WACC 5.9%, Terminal growth 1%). See NetLink Trust Target Price; NetLink Trust Analyst Reports.

Alvin Chia Phillip Securities Research | https://www.stocksbnb.com/ 2019-12-16

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