NetLink NBN Trust - UOB Kay Hian 2021-05-12: 4QFY21 In Line; Resilient Demand For Fibre Connectivity

NETLINK NBN TRUST (SGX:CJLU)

NetLink NBN Trust - 4QFY21 In Line; Resilient Demand For Fibre Connectivity

NetLink Trust's 4QFY21 core net profit (excluding a S$7.4m one-time write-off) rose 17% y-o-y due to a stable revenue base and lower finance cost. FY21 core net profit of S$102.2m (+9% y-o-y) was within expectations.
NetLink Trust declared a final DPU of 2.55 cents. Maintain BUY with an unchanged DCF-based target price of S$1.08.
NetLink Trust offers a sustainable dividend yield of 5% for FY22-24. In our view, the stock is defensive amid market volatility.

NetLink Trust (SGX:CJLU) delivered 4QFY21 core net profit of S$32.7m (+17% y-o-y, +32% q-o-q). 4QFY21 core net profit excludes a S$7.4m one-time write-off of capitalised IT system replacement contract as compared with S$15.4m in 4QFY20.
All in, FY21 core net profit surged 9% y-o-y to S$102.2m, accounting for 104% of our full-year forecast, within expectations. The good set of FY21 core earnings was driven by a resilient top-line (flat y-o-y), good cost control as EBITDA margin expanded by 1ppt y-o-y, lower finance cost (-45% y-o-y) and a higher government grant (FY20: S$1.7m, FY21: S$3.7m). This was partly offset by lower installation-related and diversion revenue as fewer construction activities have been carried out year-to-date due to the COVID-19 pandemic.
NetLink Trust declared a final DPU of 2.55 cents, bringing full-year DPU to 5.08 cents. This translated to an attractive dividend yield of 5.1%.

NetLink Trust recorded 1% y-o-y growth (flat q-o-q) in residential fibre connections to 1.447m in 4QFY21. Non-residential fibre connections also rose 1% y-o-y (flat q-o-q) to 48,100, while non-building access point (NBAP) connections grew 19% y-o-y and 6% q-o-q to 1,996.
The resilient performance suggests strong underlying demand for fibre services amid rising data consumption. As such, recurring revenue was higher, accounting for 93% of FY21’s revenue (FY20: 91%).

NetLink Trust's FY21 adjusted EBITDA margin inched up 1ppt y-o-y to 75.4%, after stripping out the one time write-off of capitalised project cost (related to a discontinued IT system replacement contract). This reflects:
1. lower operations and maintenance costs due to reduced usage of contractor resources,
2. lower installation and diversion costs, and
3. higher COVID-19-related grants from the government.
Together with a lower finance cost (-45% y-o-y) on lower average interest rate, NetLink Trust's FY21’s core net profit was S$102.2m (+9% y-o-y).

For 4QFY21, NetLink Trust grew NBAP connections by 19% y-o-y and 6% q-o-q to 1,996 connections. This segment will continue to benefit from the ongoing Smart Nation initiatives as the government continues to encourage higher productivity through digitalisation. 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 has rolled out its 5G network since Jan 21, NetLink Trust is expected to benefit from higher NBAP connections due to network densification requirements. In essence, fibre is required to deliver the high speed and low latency characteristic of 5G technology. We expect the 5G nationwide licensees like the StarHub 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.

Gross debt/EBITDA stood at 2.5x. This implies sufficient debt headroom for NetLink Trust to finance further expansion, assuming NetLink Trust keeps within the threshold of 4x for gross debt/EBITDA.

BUY NetLink Trust on share price weakness with a DCF-based target price of S$1.08 (cost of equity: 6.2%, terminal growth: 1.8%). At our target price, NetLink Trust trades at 16x FY22F EV/EBITDA, slightly above its three-year mean EV/EBITDA of 15x.
We like NetLink Trust for:
1. its good earnings visibility,
2. attractive dividend yields, and
3. potential earnings upside as NetLink Trust stands to benefit from 5G rollout.
NetLink Trust offers a dividend yield of 5% for FY22-24.
See

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 ble and transparent and regulated cash flows.

Chong Lee Len UOB Kay Hian Research | Chloe Tan Jie Ying UOB Kay Hian | https://research.uobkayhian.com/ 2021-05-12

SGX Stock Analyst Report BUY MAINTAIN BUY 1.080 SAME 1.080