NetLink NBN Trust - UOB Kay Hian 2021-06-18: A Safe Haven; Balancing Growth Opportunities With Sustainable Yields

NETLINK NBN TRUST (SGX:CJLU)

NetLink NBN Trust - "A Safe Haven; Balancing Growth Opportunities With Sustainable Yields"

NetLink Trust is evaluating potential new investments to drive future earnings. Importantly, management is cognisant of NetLink Trust’s profile as a high-yielding, safe haven stock. Key criteria of any new investments would include country risk premium and assets with stable cash flows.
NetLink Trust will have sufficient headroom to drive its acquisition ambition and offer a sustainable dividend yield of 5%. Maintain BUY on share price weakness. Target price: S$1.08.

NetLink Trust (SGX:CJLU)'s management aims to increase fibre take-up within the residential segment by working with IMDA’s Home Access programme to connect low-income households. Also, Singapore typically adds 20,000-25,000 new homes annually and this will help to drive demand for NetLink Trust’s fibre connection.
To-date, NetLink Trust boasts 1.447m residential connections with more than 90% market share. Besides, as the government continues to encourage higher productivity through digitalisation, NetLink Trust aims to continue improving network capacity, flexibility and resiliency to support government’s 5G rollout targets. In all, we expect residential, non-residential and NBAP connections to grow by 2%, 3% and 20% respectively in FY22.

Apart from the inorganic growth, NetLink Trust is currently evaluating potential new investments to drive future earnings growth. These investments will likely centre around telecommunication assets that can generate stable cash flows. This is to ensure that the risk profile of NetLink Trust and consequently, the ability to dish out sustainable dividends remains intact.
We gathered that the potential investments may include fibre network, telecoms towers, in-building systems, distribution antennas. Key markets include investment opportunities in Southeast Asia.

The time is right at this juncture because the entire telecoms sector in Southeast Asia is going through a 5G technology refresh. Consequently, a lot of telecoms operators are studying ways to monetise their existing passive assets (example, tower sale and leaseback model) as they move towards an asset-light business model to address declining ROICs. This suggests an opportunity for NetLink Trust to assess some of these asset sales (that will be accompanied by leaseback contracts).
There is no fixed timeline and NetLink Trust’s management may even consider either a JV or consortium outfit. The key criteria is earnings and cash flow should be sustainable for the group.

Management remains cognisant of NetLink Trust’s profile as a high yielding, safe haven stock. As such, key criteria of any potential new investment in the near horizon would have to include:
1. country risk premium, and
2. preferably stable cash flow via an asset sale and leaseback model.
Importantly, NetLink Trust will have sufficient headroom to drive its acquisition ambition without compromising on cash flow and dividends. Gross debt/EBITDA of 2.5x as of 31 Mar 21 provides ample room to increase debt for the group.
We project an annual DPU of 5.1 cents from NetLink Trust for FY22-24. This translates to a sustainable 5.3% net dividend yield. See NetLink Trust's Dividend History.
We continue to see NetLink Trust as a good shelter amid market volatility given its strong earnings visibility, healthy balance sheet and cautious approach in terms of overseas/domestic acquisition approach.

For FY21, NetLink Trust grew non-building access point (NBAP) connections 18% y-o-y to 1,996 connections. The division 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 rolls out 5G network and services, 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 StarHub and the M1 consortium and localised licensee TPG to work closely with NetLink Trust to provide comprehensive fibre infrastructure to minimise total 5G capex.

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.

BUY on weakness of NetLink Trust share price; DCF-based target price of S$1.08 (cost of equity: 6.3%, terminal growth: 1.8%). At our target price for NetLink Trust, the stock trades at 17x FY21F EV/EBITDA, +1 standard deviation above its three-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

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 rollout of 5G/Smart Nation initiatives, and
3. investors seeking defensive yield from NetLink's resilient, predictable and transparent and regulated cash flow.

Chong Lee Len UOB Kay Hian Research | Chloe Tan Jie Ying UOB Kay Hian | https://research.uobkayhian.com/ 2021-06-18

SGX Stock Analyst Report BUY MAINTAIN BUY 1.080 SAME 1.080