NetLink NBN Trust - DBS Research 2020-05-08: Low Interest Rate Is Like A Double-Edged Sword

NETLINK NBN TRUST (SGX:CJLU)

NetLink NBN Trust - Low Interest Rate Is Like A Double-Edged Sword

Excluding one-off items, NetLink Trust's FY20 EBITDA of S$274m (+10%) was 2.5% above our estimate; FY20 distribution per share of 5.05Scts met expectations.
NetLink Trust has outperformed STI significantly year-to-date and upside potential is limited now.

NetLink Trust (SGX:CJLU's FY20 revenue in line with our expectations and EBITDA excluding one-off items remained 2.5% higher than our estimate. Excluding one-off cost of S$15.4m, FY20F EBITDA S$274m rose 10% y-o-y and 2.5% higher than our estimate of S$267m, primarily due to higher-than-expected margins. See NetLink Trust Announcements.
EBITDA margins excluding one-off item improved by 374bps to 74% in FY20. The one-off cost was a write off pertaining to a capitalised project cost in relation to a discontinued IT system replacement project valued at S$15.4m which was recognised during 4Q20.
NetLink Trust declared earnings distribution of 2.53Scts for 1H21 (1H20: 2.52Scts). See NetLink Trust Dividend History.

During FY20, NetLink Trust’s revenue from residential connections rose by 12% y-o-y to S$231.5m, representing 62.5% of the total revenue. The number of residential connections grew by 0.4% q-o-q (7.5% y-o-y) to 1.43m connections, which was in line with our expectations.

Non-residential fibre connections rose by 4.1% y-o-y to S$31.2m following suit, NBAP connections and segments witnessed 3.4% and 2.2% q-o-q respectively.

As of Dec 2019, NetLink Trust’s network had passed over 1.5m residential homes, while there were 1.43m residential end-user connections, representing 95% of homes passed. NetLink Trust should benefit from StarHub’s accelerated fibre migration over 1HFY20 which will have a full-year impact over FY21F.
In the subsequent years, we expect NetLink Trust to benefit from
1. higher end-user fibre penetration currently, and
2. growth in the number of new households.

NetLink Trust expanded its market share from c.30% in FY17 to c.34% in FY18, having grown from zero in 2012. Growth in market share will be driven by an expanding SME market, which is mainly located outside of the Central Business District (CBD) and business parks where NetLink Trust faces lower competition from other fibre network providers due to its relatively extensive nationwide network coverage.
Key strategies include:
1. deploying fibre within selected non-residential buildings, and
2. extending network footprint into new major developments such as the Greater Southern Waterfront project.

Growth opportunities could arise from the Smart Nation Programme, which requires the deployment of a network of sensors and monitoring equipment across Singapore to support applications such as autonomous vehicles, high-definition surveillance cameras, parking space management and weather data collection. NetLink Trust continues to support the Requesting Licensees and government agencies in the rollout of Smart Nation initiatives.

NetLink Trust share price has outperformed the Straits Times Index (STI) by 25% year-to-date. See Straits Times Index (STI) constituents share price performance. The Singapore Government’s 10-year bond yield has dropped to an all-time low of 0.9% recently, pushing investors to chase yield. However, we expect the Singapore Government’s 10-year bond yield to rise modestly over the next 12 months and project NetLink Trust to trade around 5% yield by March 2021.
Currently, NetLink Trust offers 5.2% yield vs. 5.1% average yield offered by large-cap industrial Singapore Real Estate Investment Trusts (S-REITs), which is relatively attractive given NetLink Trust’s lower gearing and longer asset life.
See NetLink Trust Share Price; NetLink Trust Target Price; NetLink Trust Analyst Reports; NetLink Trust Dividend History; NetLink Trust Announcements; NetLink Trust Latest News.

Positive in the near term but negative in the long term due to NetLink Trust’s regulatory regime. If interest rates continue to be low over the next 2-3 years (vs. our base case of a modest rise), the stock might benefit from the chase for yields in the near term. However, low cost of debt may also lead to NetLink Trust’s regulatory weighted average cost of capital (WACC) for the next review period (Jan 2023-Dec 2027) to be revised down. This might lead to a cut in future distributions, implying downside risk for the stock.

Sachin MITTAL DBS Group Research | Rui Wen LIM DBS Research | https://www.dbsvickers.com/ 2020-05-08

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