NetLink NBN Trust - OCBC Investment 2022-02-17: Healthy Growth In Connections

NETLINK NBN TRUST (SGX:CJLU)

NetLink NBN Trust - Healthy Growth In Connections

NetLink NBN Trust (SGX:CJLU)’s 3QFY22 revenue was down 1% y-o-y to S$94m, in part due to the drop in Central Office and diversion revenues, which offset growth associated with other fibre connections.
On a 9MFY22 basis, EBITDA was down 6% y-o-y due mostly to 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 from Sep21. Still, this is not expected to have a material cashflow impact for FY22 or subsequent years.

We observe that 3QFY22 witnessed a notable pickup of fibre connections in general. Residential connections increased by ~7k q-o-q (highest in 5 quarters) while non-residential also registered ~700 net adds q-o-q. What was particularly encouraging was the strong growth in NBAP and Segment connections (albeit off a smaller base), stemming from installation of point-to-point connections for 4G/5G operators, as well as the build out of networks as required by government agencies.
We also understand that the NetLink NBN Trust's 3QFY22 EBITDA margin of 75% is representative of normalised recurring revenue margins that are diluted by diversion revenue which is lower margin in nature.
We believe that management continues to be on the lookout for new investment opportunities that exhibit stable cashflows within the telecoms infrastructure space. Still, we acknowledge that in the near-term, there could be a slight overhang on the name, given uncertainty over the outcome of the regulatory pricing review for 2023-2027.
Given the prospect of rising rates, we take the chance to revise our risk-free rate upwards and consequently, our fair value estimate for NetLink NBN Trust moves from S$1.10 to S$1.06.

Research believes that the company outperforms peers in the key issues of labor management and governance. Dependence on regulatory licenses may expose NetLink NBN Trust 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, it 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, and found limited evidence of best practices such as external IT system audits.
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OCBC Research Team OCBC Investment Research | https://www.iocbc.com/ 2022-02-17

SGX Stock Analyst Report BUY MAINTAIN BUY 1.06 DOWN 1.100