NetLink NBN Trust - UOB Kay Hian 2022-02-16: 3QFY22 In Line; Network Rollout Lifts NBAP Connections

NETLINK NBN TRUST (SGX:CJLU)

NetLink NBN Trust - 3QFY22 In Line; Network Rollout Lifts NBAP Connections

NetLink NBN Trust’s 3QFY22 core earnings grew 4% y-o-y to S$25.7m (-7% q-o-q). NBAP connections continued to grow (+52% y-o-y) thanks to network and 5G rollout while residential connections remained stable. This brought 9MFY22 core earnings to S$78.2m – in line.
The next regulatory review comes into effect in 2023 as the company is currently in discussion with the government.
We cut FY23 earnings forecast for NetLink NBN Trust by 4% on higher interest cost. Maintain HOLD with a lower target price of S$1.05.

NetLink NBN Trust (SGX:CJLU) reported a 3QFY22 core net profit of S$25.7m (+4% y-o-y, -7% q-o-q). The y-o-y increase was driven by lower finance cost (- 46% y-o-y) and good cost discipline. The sequential weakness was impacted by lower revenue from diversion revenue (-21% q-o-q) and lower tax credit (-87% q-o-q). This brings 9MFY22 results to S$78.2m (+13% y-o-y), accounting for 78% of our full-year forecast – in line, while topping consensus expectation (84% of full-year forecast).
Top-line dragged slightly by lower diversion revenue… Total revenue for 3QFY22 was lowered by 1% y-o-y and q-o-q, mainly due to a 17% y-o-y and 21% q-o-q reduction in diversion revenue.
…offset by growth in NBAP revenue. Positively, NetLink NBN Trust recorded a 52% y-o-y growth (+5% q-o-q) in non-building address points (NBAP) connection revenue on the back of higher demand for point-to-point connections with the rollout of 5G network, and Central Office-diversity connections to support mobile network rollout. Additionally, residential connection revenue remained stable, growing 1% y-o-y as connections continue to rise to 1.458m (+1% y-o-y and q-o-q).

With the last regulatory review (effective Jan-18), NetLink NBN Trust expects the next regulatory review to be carried out by the end of this year and take effect from 2023 onwards.
NetLink NBN Trust is currently in discussion with the Infocomm Media Development Authority (IMDA) and alluded that the next return on regulated asset base (RAB) should be in line with the current 7% (pre-tax WACC). This will depend on the assumption of the forward yield curve and debt premium.

Key priorities include connecting more residential homes that are not on fibre (especially low-income households) via the IMDA Home Access programme. NetLink NBN Trust guided that the IMDA will bear the two-year subsidised fibre broadband connectivity and NetLink NBN Trust’s pricing would not be affected in this initiative.
For non-residential and NBAP connections, NetLink NBN 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 NBN Trust reiterated that its business remains resilient amid market volatility.
Safe haven; attractive 5.2% dividend yield. Management remains cognisant of NetLink NBN 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. a preferably stable cash flow via an asset sale and leaseback model.
Importantly, NetLink NBN Trust will have sufficient headroom to drive its acquisition ambition without compromising on cash flow and dividends. Gross debt/EBITDA of 2.6x as of 31 Dec 21 provides ample room to increase debt for the group.
We project an annual DPU of S$0.051 for FY22-24. This translates to a sustainable 5.2% net dividend yield.

We lowered FY23-34 earnings forecast for NetLink NBN Trust by 4%/2% respectively as we increased our interest cost assumption, in line with the rising rate environment.
Maintain HOLD with a lowered DCF-based target price of S$1.05 (cost of equity: 6.3%, terminal growth: 1.8%) in tandem with earnings downgrade. We also rolled over our valuation window to FY23. At our target price, NetLink NBN Trust trades at 15x FY23F EV/EBITDA, (1 standard deviation above its four-year mean EV/EBITDA of 13.8x).
We continue to see NetLink NBN Trust as a good shelter amid market volatility given its strong earnings visibility, healthy balance sheet and cautious approach in terms of overseas/domestic acquisitions.
See
Key catalysts include:
- 5G beneficiary – more opportunities arising from mobile operators’ fibre network densification demand,
- growth in demand for NBAP connections with the rollout of 5G/Smart Nation initiatives,
- investors seeking defensive yield from Netlink’s resilient, predictable, transparent and regulated cash flow, and
- earnings-accertive M&As.

Chong Lee Len UOB Kay Hian Research | Chloe Tan Jie Ying UOB Kay Hian | https://research.uobkayhian.com/ 2022-02-16

SGX Stock Analyst Report HOLD MAINTAIN HOLD 1.05 DOWN 1.080