NetLink NBN Trust - UOB Kay Hian 2020-05-11: 4QFY20 Above Expectations; Defensive Shelter From Market Volatility


NetLink NBN Trust - 4QFY20 Above Expectations; Defensive Shelter From Market Volatility

  • NetLink Trust's 4QFY20 core net profit (excluding a S$15.4m one-time write-off) surged 39% y-o-y amid higher residential revenue and economies of scale. FY20 core net profit of S$93.5m (+21% y-o-y) came in above expectations.
  • We raised FY21-22 net profit by 4% on housekeeping (higher residential fibre connection as of end-Mar 20).
  • Maintain BUY on share price weakness with a higher target price of S$1.08.
  • NetLink Trust offers sustainable dividend yield of 5% over FY21-23, its business model is defensive amid market volatility.

NetLink Trust's 4QFY20 Results

  • NetLink Trust (SGX:CJLU) delivered 4QFY20 revenue of S$92.4m (+5% y-o-y, +1% q-o-q) and core net profit of S$27.9m (+39% y-o-y, +30% q-o-q). 4QFY20 core net profit excludes a S$15.4m one-time write-off of capitalised IT System replacement contract. Due to the strong results, FY20 core net profit surged 21% y-o-y to S$93.5m. The results accounted for 109% of our full-year forecast, above expectations.
  • The good set of 4QFY20 earnings was driven by higher residential revenue (+9% y-o-y) and economies of scale (EBITDA margin expanded 5.5ppt y-o-y to 77% in 4QFY20).
  • NetLink Trust declared a final DPU of 2.53 S cents, bringing full-year DPU to 5.05 S cents.

Residential: Robust connections growth.

  • NetLink Trust recorded 8% y-o-y (flat q-o-q) growth in residential fibre connections to 1.427m in this quarter. This drove a 9% y-o-y (flat q-o-q) increase in residential connection revenue. With StarHub (SGX:CC3) having completed its fibre migration process as of end-Sep 19, we expect residential connections growth to moderate to 2% y-o-y (FY21-23) from hereon. This is underpinned by an estimated 25,000 new home connections in Singapore annually.

Non-residential: Stable base.

  • Non-residential fibre connections expanded 3% y-o-y and 1% q-o-q to 47,681. Revenue contribution from this segment grew 4% y-o-y and 1% q-o-q.
  • Non-building access point (NBAP) connections grew 6% yoy and 2% qoq to 1,679 while revenue contribution from this segment fell 1% y-o-y (flat q-o-q).

Economies of scale.

  • Stripping out the one-time write-off of capitalised project cost (related to a discontinued IT system replacement contract), 4QFY20 adjusted EBITDA margin rose 5.5ppt y-o-y and 3.4ppt q-o-q to 77%. This reflects:
    1. economies of scale,
    2. SFRS 16 impact – effective 1 Apr 19, and
    3. higher other income from government grants.
  • This was partly offset by higher finance cost due to a larger borrowing base and higher diversion cost.

Positive FY21 outlook.

  • Key priorities include connecting more residential homes that are not on fibre (especially low-income households) via the Infocomm Media Development Authority’s (IMDA) Home Access programme. NetLink Trust guided that the IMDA will bear the two-year subsidised fibre broadband connectivity and NetLink Trust’s pricing would not be affected in this initiative.
  • For non-residential and NBAP, NetLink Trust will focus on adding more capacity to densify network and support 5G infrastructure. It also aims to deepen penetration on data centres’ point-to-point connections. More importantly, NetLink Trust re-iterated that its business remains resilient amid market volatility.
  • FY21 capex will be at similar levels as FY19-20 but deferments of construction works due to COVID-19 may affect the timing of budgeted expenditure.

Strong balance sheet.

  • NetLink Trust has a low gearing with gross debt/EBITDA at 2.6x while pre-adjusted EBITDA interest coverage is high at 13.4x. This implies sufficient debt headroom for the group to finance further expansion, assuming NetLink Trust keeps within the threshold of 4x for gross debt/EBITDA.

Earnings Revisions

  • We raise NetLink Trust's FY21-22 earnings by 4% on house-keeping (higher residential fibre connection as of Mar 20).
  • BUY on share price weakness with a marginally higher DCF-based target price of S$1.08 (cost of equity: 6.3%, terminal growth: 1.8%). At our target price, the stock trades at 17x FY21F EV/EBITDA, +1SD above its 3-year mean EV/EBITDA of 15.3x.
  • See NetLink Trust Share Price; NetLink Trust Target Price; NetLink Trust Analyst Reports; NetLink Trust Dividend History; NetLink Trust Announcements; NetLink Trust Latest News.
  • We expect NetLink Trust to further outperform as investors seek shelter in high dividend yielding stocks amid external volatility.
  • Key catalysts include:
    1. 5G beneficiary – more opportunities arising from mobile operators’ fibre network densification demand,
    2. growth in demand for NBAP connections with the roll-out of 5G/Smart Nation initiatives, and
    3. investors seeking defensive yield from NetLink Trust's resilient, predictable and transparent and regulated cash flows.

Adrian LOH UOB Kay Hian Research | Singapore Research Team UOB Kay Hian | 2020-05-11
SGX Stock Analyst Report BUY MAINTAIN BUY 1.08 UP 1.050