NetLink NBN Trust - DBS Research 2020-02-11: 5% Yield Still Attractive

NETLINK NBN TRUST (SGX:CJLU)

NetLink NBN Trust - 5% Yield Still Attractive

NetLink Trust (SGX:CJLU) is trading at c.5.0% FY20F yield, versus an average yield of 4.8 % 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.

NetLink Trust's 3QFY20’s revenue and NPAT of S$91.6m and S$21.5m were +3.0% y-o-y/-2.6% q-o-q and +9.6% y-o-y/-7.2% q-o-q respectively, broadly in line with consensus. Revenue growth y-o-y was largely from higher residential connections, offset by lower installation-related revenue, diversion revenue, and ducts and manhole revenue.
Lower installation-related revenue (-30.1% y-o-y/-19.0%q-o-q) of S$4.4m was largely due to lower residential installation charges and service activation charges. EBITDA margin improved to 73.6% (2Q19: 73.0%) as expenses were largely flat y-o-y/+7.0% q-o-q.
No DPU was declared this quarter (unchanged y-o-y).

Ducts and manhole revenues, which is regulated under RAB, have been declining y-o-y over the last three quarters. For 9MFY20, ducts and manhole revenues declined 18.3% to S$23.0m. According to management, the decline is attributable to
1. a slow down of jointly-built projects with SingTel (SGX:Z74),
2. a portion of contractual ducts and manholes revenue pertains to rental of ducts and manholes by SingTel for their copper wires; chargeable length of wires has decreased during the period and is expected to decrease over the next few years as SingTel continues to reduce copper wires network.
While there may be topline impact for NetLink Trust, we remain satisfied that the lower revenues will be included in RAB assessment at the next regulatory reset, which will go into determining the ICO price offered to retail players

As of 31 Dec 2019, NetLink Trust’s residential connections grew 0.8% q-o-q to reach 1.42m connections. StarHub (SGX:CC3) cable migrations were largely over last quarter and according to management, 0.8% q-o-q is closer to the steady state growth expected in subsequent quarters. Together with telcos, NetLink Trust is looking into extending fibre connections to unreached groups e.g. elderly homes and those in the lower income brackets.

On the other hand, non-residential fibre connections grew 1.4% q-o-q, while NBAP connections and segment connections increased 3.5% and 9.4% q-o-q. Competition in the non-residential fibre connections space remains similar to previous quarters. NetLink Trust is working with telcos to target ~200k smaller SMEs who are currently not on fibre broadband.
Currently, NetLink Trust has no further details on timing of 5G rollout by telcos. NetLink Trust has been supporting M1 and TPG on various 5G trials and is able to support telcos should they require more base stations during 5G rollout.

Maintain BUY, higher Target Price of S$1.05. Our DCF valuation assumes 5.4% WACC and 1.2% terminal growth based on long-term household formation rate.
Our change in Target Price is largely on the back of lower WACC (5.5% previously) to factor the reduced cost of debt. We revised our EBITDA by - 3% each for FY20/21F mainly due to lower ducts and manhole revenue assumptions.
See NetLink Trust Share Price; NetLink Trust Target Price; NetLink Trust Analyst Reports; NetLink Trust Dividend History; NetLink Trust Announcements; NetLink Trust Latest News.

Sachin MITTAL DBS Group Research | Rui Wen LIM DBS Research | https://www.dbsvickers.com/ 2020-02-11

SGX Stock Analyst Report BUY MAINTAIN BUY 1.05 UP 1.040