NetLink NBN Trust - UOB Kay Hian 2020-08-11: 1QFY21 In Line, Domestic Connections Grew 3% Y-o-y

NETLINK NBN TRUST (SGX:CJLU)

NetLink NBN Trust - 1QFY21 In Line, Domestic Connections Grew 3% Y-o-y

NetLink Trust reported resilient 1QFY21 core net profit of S$23.5m (+12% y-o-y). The COVID-19 impact is seen as sequential drop of 16% is due to lower installations and diversion income. We expect the company to play catch up from 2QFY21 onwards as activities and workforce have recovered to pre-COVID-19 levels at the beginning of Aug 20.
NetLink Trust offers sustainable dividend yield of 5%. BUY on share price weakness with a DCF-based target price of S$1.08.

NetLink Trust (SGX:CJLU) delivered 1QFY21 revenue of S$89.0m (-3% y-o-y, -4% q-o-q). The decline was due to lower activity-based installations and diversion revenue. As a result of COVID-19, lockdown restrictions led to fewer contractors being available to carry out installation and diversion works. This was partly cushioned by higher residential revenue thanks to a 3% y-o-y growth in residential connections (to 1.43m).
Despite top-line weakness, the company achieved commendable 1QFY21 core net profit of S$23.5m (+12% y-o-y). This was driven by good cost control and a S$3m COVID-19-related grants from the government in the quarter.
EBITDA margin inched up 5ppt to 77.3% vs 1QFY20. Sequentially, earnings were adversely affected by lower tax credits (1QFY21: S$0.9m, 1QFY20: S$3.3m). 1QFY21 core net profit account for 24% our full-year forecast, and we deem the results to be within expectations.

For 1QFY21, NetLink Trust's total revenue declined 3% y-o-y as a result of:
1. a S$5.6m decline in installation and diversion revenue,
2. lower non-residential connections; and
3. normalised single-digit residential connection growth of 3% y-o-y vs FY20’s 7% residential growth.
All in all, recurring revenue was higher, accounting for 85% of 1QFY21’s revenue (1QFY20: 79%).

Importantly, NetLink Trust has been playing catch-up in terms of clearing installation backlogs since the reopening of economy in mid-June, as workers have largely resumed work in full force. This suggests underlying demand for fibre connectivity remains strong with rising data consumption.

For 1QFY21, NetLink Trust grew NBAP connections by 18% y-o-y and 6% q-o-q to 1,772 connections. The division will continue to benefit from the ongoing Smart Nation initiatives as the government continues to encourage higher productivity through digitisation. A smart housing estate, for example, will require fibre to connect sensors, WiFi hotspots and outdoor infrastructure (part of NBAP connections) which will pave the way for future smart applications in a smart nation ecosystem.

As Singapore will start to roll out 5G network from Jan 21 onwards, NetLink Trust is expected to benefit from higher NBAP connections due to network densification requirement. In essence, fibre is required to deliver the high speed and low latency characteristic of 5G technology.
We expect the 5G nationwide licensees like StarHub (SGX:CC3) and M1 consortium, as well as the localised licensee TPG to work closely with NetLink Trust to provide comprehensive fibre infrastructure to minimise total 5G capex.

1QFY21 EBITDA margin expanded 5ppt y-o-y (flat q-o-q) to 77.3% as a result of:
- economies of scale, and
- higher other income from government grants.
NetLink Trust has guided that the government grants will be lower for the rest of FY21. Importantly, 90% of NetLink Trust’s costs are fixed in nature (staff cost, fibre cost) and therefore, operating leverage is high for the company. That said, as fibre connections continue to grow, the company benefits from economies of scale.

NetLink Trust has a low gearing with gross debt/EBITDA at 2.6x while pre-adjusted EBITDA interest coverage is high at 14.4x. 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.

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.

We believe the good set of results will pave the way for the company to maintain its DPU payout of 5.1 S cents for FY21. This translates to an attractive 5.2% net dividend yield.
NetLink Trust offers shelter amid market volatility given its strong earnings visibility and healthy balance sheet.

Buy on share price weakness, 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.
We expect NetLink Trust to further outperform as investors seek shelter in high dividend yielding stocks amid external volatility.
See NetLink Trust Share Price; NetLink Trust Target Price; NetLink Trust Analyst Reports; NetLink Trust Dividend History; NetLink Trust Announcements; NetLink Trust Latest News.
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.

Chong Lee Len UOB Kay Hian Research | Chloe Tan Jie Ying UOB Kay Hian | https://research.uobkayhian.com/ 2020-08-11

SGX Stock Analyst Report BUY MAINTAIN BUY 1.080 SAME 1.080