NetLink NBN Trust - OCBC Investment 2020-08-07: Looking Past Temporary Operational Issues


NetLink NBN Trust - Looking Past Temporary Operational Issues

  • NetLink Trust's 1QFY21 scorecard decent with EBITDA margin uplift from better temporary mix.
  • Workforce bottlenecks gradually resolved; previous capex guidance likely challenging to achieve.
  • Strong balance sheet; maintain Fair Value of S$1.10.

NetLink Trust's 1QFY21 broadly within expectations

  • NetLink Trust (SGX:CJLU)’s (NLT NBN) 1QFY21 revenue decreased 3.3% y-o-y to S$89.0m, which was mainly due to lower activity-based installation and diversion revenue as a result of COVID-19.
  • During the quarter, there was lower availability of contractor resources and restricted access to homes/buildings, while fewer completed and bill projects resulted from stoppages of construction work nationwide affecting cable diversion work. Lower y-o-y installation-revenue was also due to fewer installation orders and service activations as compared to 1QFY20 when StarHub (SGX:CC3) was migrating its coaxial subscribers onto fibre. Consequently, EBITDA margin was 5 ppts higher y-o-y at 77.3% due largely to the higher proportion of revenue from residential connections and from Government relief grants received.
  • We understand from management that S$1m of property tax rebate (net basis) and S$2m from the Job Support Scheme was recognised during the quarter. Consequently, PATMI rose 12.4% y-o-y to S$23.5m, constituting 24.6% of our full-year forecast.

Open to appropriate acquisitions; cognisant of downside risk to WACC

  • Non-residential connections dropped from 47.7k in FY20 to 47.0k in 1QFY21, with the negative addition for the quarter due to NetLink Trust’s inability to fulfill non-residential service provisioning orders that require site visits due to COVID-19, while termination orders were not similarly affected by such constraints.
  • Still, we are encouraged to note that the full complement of workforce for service provisioning work is now available from the beginning of Aug. However, capacity to conduct outdoor-related work is still below 50% at this point due to foreign worker constraints.
  • Management shared that they are open to considering acquisitions of infrastructure assets with a similar cashflow-generative profile as their existing fibre network, and clarified that they are not looking to move into the competitive space where their customers reside in. Previous FY21 capex guidance of being in-line with that of FY20 (~S$75m) is likely to be unrealistic, given the COVID-19 disruptions.
  • Separately, given the low interest rate environment, there has been concern around a lower WACC being used for the next pricing review. While we believe such concerns are valid, management has shared that they believe that the authorities will base their risk-free rate assumption on a longer time horizon.

Maintain Fair Value Estimate of S$1.10

OCBC Research Team OCBC Investment Research | https://www.iocbc.com/ 2020-08-07
SGX Stock Analyst Report BUY MAINTAIN BUY 1.100 SAME 1.100