NetLink NBN Trust - OCBC Investment 2021-11-08: Look Past The Accounting Adjustment


NetLink NBN Trust - Look Past The Accounting Adjustment

  • Rental reduction and resizing by SingTel unlikely to have material impact.
  • Not in a hurry to expand inorganically.
  • Maintain fair value estimate of S$1.10 for NetLink NBN Trust.

Noise from remeasurement loss

  • NetLink NBN Trust (SGX:CJLU)’s 1HFY22 revenue grew 3.6% y-o-y to S$187.9m, which was driven mainly by higher residential, NBAP & segment connections revenue, installation-related revenue and diversion revenue, though partially offset by lower ducts and manholes service revenue and Central Office revenue.
  • While EBITDA came in 9.4% lower y-o-y at S$126.6m, we note that this was mainly on the back of a remeasurement loss of S$12.4m relating to finance lease receivables arising from the reduction in rental rates upon the renewal of the Central Office lease agreements with SingTel (SGX:Z74) from Sep 2021. There were also lower government grants recorded vs the amount received in 1HFY21.
  • Finance costs fell 45% y-o-y due to the lower average interest rate in 1HFY22 (1.06%) vs that in 1HFY21 (2.48%).
  • All considered, NetLink NBN Trust's PAT fell 10.5% y-o-y to S$40.1m.
  • NetLink NBN Trust has reported a 1HFY22 DPU of 2.56 cents, which is 1.2% y-o-y higher than that of 1HFY21.

Fair Value estimate of S$1.10 for NetLink

  • NetLink NBN Trust’s residential fibre connections have seen more modest growth over the past 2 quarters, which we believe can be attributed to elevated penetration rates and construction delays for new builds.
  • On non-residential fibre connections, management noted that its scheme focused on SMEs has yielded healthy numbers. On the call, management also shared that SingTel has entered into a lease renewal for another 10 years, and has reduced some of their space requirements given their option to resize. We understand that the resizing and rental reduction is unlikely to have material revenue impact moving forward and should be < 1% of revenue.
  • On acquisitions, while discussions are underway with various parties, management noted that the team is not in a hurry, as they continue to assess the deal flow in the region and study various infrastructure assets.
  • We continue to remain positive on NetLink NBN Trust given the resiliency of its business model as we await further developments on potential inorganic growth opportunities. We maintain our fair value estimate of S$1.10 for NetLink NBN Trust now.
  • See

NetLink NBN Trust - ESG Updates

  • NetLink NBN Trust outperforms peers in the key issues of labor management and governance. Dependence on regulatory licenses may expose NetLink to corruption-related risks. Also, given it is a state-owned entity (SOE), its ethics programs may be subject to increased scrutiny.
  • Like SOE peers, NetLink NBN Trust's efforts to promote corporate conduct include a detailed anti-corruption policy and a whistleblower mechanism.
  • On corporate governance, NetLink NBN Trust has a majority independent board, which is supported by independent key committees and is led by a fully independent chairman. This structure may help mitigate potential governance risks stemming from related-party transactions with key shareholders.
  • On regulatory risks such as a data breach, while we understand that NetLink NBN Trust deploys preemptive measures, including encryption, there was limited evidence of best practices such as external IT system audits.

OCBC Research Team OCBC Investment Research | https://www.iocbc.com/ 2021-11-08
SGX Stock Analyst Report BUY MAINTAIN BUY 1.100 SAME 1.100