NETLINK NBN TRUST (SGX:CJLU)
NetLink NBN Trust - A Safe Haven, Stock Offers Sustainable Dividend Yield Of 5.1%
- Residential connections are expected to taper off a high base in 1HFY20 with the completion of StarHub (SGX:CC3)’s fibre migration programme. This will provide a stable 2HFY20 net profit base of S$20m/quarter and paves the way for a 5.1% dividend yield.
- NETLINK NBN TRUST (SGX:CJLU) offers good earnings visibility. We raise FY20-22 net profit forecasts by 6%, 8% and 2% on positive operating leverage (90% of cost is fixed) and higher NBAP connections in view of the 5G roll-out.
- Maintain BUY with a higher NetLink Trust Target Price.
WHAT’S NEW
Normalising residential connections growth of 2%...
- We expect residential connections growth to moderate to 2% annually in FY21 and FY22 vs a high base of 14% in 1HFY20 as StarHub completed its fibre migration process on 30 Sep 19. To-date, NetLink NBN Trust boasts 1.41m residential connections with a 90% market share.
- We expect Singapore to add 25,000 new homes annually and this will drive demand for NetLink NBN Trust’s fibre connections. Based on our sensitivity analysis, a 1% change in residential connections will swing FY21 net profit by 1.3%.
…while non-residential connections continue to benefit from digitalisation of the nation.
- As the government continues to encourage higher productivity through digitalisation, we expect non-residential connections to gradually grow from 46,742 points to 51,000 points by FY22. Current market share is estimated at 33%.
- In addition, NetLink NBN Trust will continue to benefit from TPG’s network roll-out (expected by end-20) and the resumption of smart nation projects. A smart housing estate, for example, will require fibre connections to sensors, Wi-Fi hotspots and outdoor infrastructure (part of NBAP connections) which will pave the way for future smart applications in a smart nation ecosystem.
Stable 2HFY20 earnings, driven by economies of scale.
- We expect NetLink NBN Trust to make approximately S$20m per quarter for 2HFY20 (1HFY20: S$44m) on the back of:
- stable residential connections of 1.43m by end-Mar 20, and
- positive operating leverage (EBITDA margin: 71%).
- 90% of NetLink NBN Trust’s costs are fixed in nature (staff cost, fibre cost) and therefore, operating leverage is high for the company. As connections grow, the company benefits from economies of scale.
Safe haven, attractive 5% dividend yield.
- We believe the good set of results will pave the way for the company to pay out an estimated 5.1 S cents in DPU (1HFY20: 2.52 S cents). This translates to an attractive 5.1% net dividend yield.
- NetLink NBN Trust offers shelter amid market volatility given its strong earnings visibility and healthy balance sheet.
STOCK IMPACT
Key priorities for FY21 include:
- Residential: New housing developments to drive 2% y-o-y growth in residential connections,
- Non-residential: Partnerships with Requesting Licensees (RLs) and to continue to serve SMEs (approximately 200-300,000 business connection opportunities) and government agencies with a focus on SMEs, and
- NBAP: Adding capacity, flexibility and resilience to denser network and preparing to support 5G infrastructure.
7% return on regulated asset base (RAB)…
- Importantly, there are no regulatory risks in the next 24 months as there will be no mid-term review by the Infocomm Media Development Authority (IMDA). As such, we continue to like NetLink NBN Trust for its good earnings visibility and cashflow prowess.
- The next regulatory review is in 2023, with expectations of a downgrade adjustment to S$13.80 per residential connection (due to high base effect of residential connections, to be partly offset by higher capex for the next regulatory cycle).
…paves the way for attractive and sustainable dividend yields.
- 80% of NetLink NBN Trust’s earnings are regulated and recurring in nature. This paves the way for sustainable dividend yield of 5.1-5.3% for FY20-22. See NetLink Trust Dividend History.
Strong balance sheet.
- NetLink NBN Trust has a low gearing with gross debt/EBITDA at 2.4x while EBITDA interest coverage is high at 13.6x. There is sufficient debt headroom of S$400m for FY20 to finance further expansion, assuming NetLink NBN Trust keeps within the threshold of 4x for gross debt/EBITDA.
Reaping the benefits from 5G commercial roll-out.
- In the longer run (beyond 24 months), NetLink NBN Trust will benefit from higher NBAP connections as Singapore races towards 5G. In essence, fibre is required to crystallise the speed and low latency characteristic of 5G technology.
- We expect the StarHub and M1 consortium to work closely with NetLink NBN Trust to provide comprehensive fibre infrastructure to minimise total 5G capex.
EARNINGS REVISION/RISK
- We raise FY20-22 net profit forecasts by 6%, 8% and 2% respectively to account for positive operating leverage and higher non-residential and NBAP connections from FY21 onwards.
- We project a 3-year earnings CAGR (FY19-22) of 7.6%. In the near term, earnings will be driven by residential connections and good cost discipline.
Capex to exceed FY19’s spend as NetLink seeks to densify network.
- We expect FY20’s capex to exceed the S$71m capex spent in FY19 as the company aims to densify the network. This will drive the RAB and earnings of NetLink NBN Trust. Unlike telcos, we do not expect NetLink NBN Trust’s cashflow to be impaired by the 5G roll-out as the company is a passive infrastructure owner. Active hardware needs will be upgraded/replaced by telcos. Therefore, the onus of rolling out the 5G network (and heavy capex burden) lies on the telcos/spectrum holder.
- Key risks include a lower-than-expected rate of return (WACC) in the next regulatory period, ie from Jan 23.
VALUATION/RECOMMENDATION
- Maintain BUY with a marginally higher DCF-based target price (cost of equity: 6.3%, terminal growth: 1.5%) in tandem with the higher earnings estimates. See NetLink Trust Target Price.
- At our target price, the stock trades at 17.2x EV/EBITDA, +1SD to its 3-year mean EV/EBITDA of 15.3x.
- NetLink NBN Trust has outperformed the STI by 9% ytd and we expect further outperformance as investors seek shelter in high dividend yielding stocks amid external volatility.
- Buy on:
- good earnings visibility, and
- attractive dividend yields.
- We forecast DPU of 5.1 S cents for FY20 and FY21, with distribution yields of 5.1% respectively. See NetLink Trust Dividend History.
- See NetLink Trust Share Price; NetLink Trust Analyst Reports.
SHARE PRICE CATALYST
- Growth in demand for NBAP connections should the government accelerate the roll-out of Smart Nation initiatives.
Chong Lee Len
UOB Kay Hian Research
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Chloe Tan Jie Ying
UOB Kay Hian
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https://research.uobkayhian.com/
2020-01-30
SGX Stock
Analyst Report
1.05
UP
1.010
