NetLink NBN Trust - Maybank Research 2022-08-16: Run Its Course For Now But Limited Growth


NetLink NBN Trust - Run Its Course For Now But Limited Growth

  • NetLink Trust (SGX:CJLU)'s PATMI for 1QFY23 rose to S$27.6m (+11.3% y-o-y), ahead of MIBG/consensus expectations, accounting for 29%/28% of the respective FY23 forecasts. The increase was mainly due to a surge in ancillary project revenue (+137% y-o-y).
  • We conservatively trim our FY23-25F PATMI estimates for NetLink Trust by 2-4% on concern over rising interest cost. As such, we downgrade our call for NetLink Trust from Buy to HOLD with a 5% lower DDM-based target price of S$1.00 as we raise our cost of equity (COE) to 6.6% on a higher risk-free rate assumption.

Topline improved with continued operational growth

  • NetLink Trust's 1QFY23 revenue increased (+2.3% q-o-q) on a stronger contribution from ancillary project revenue (+33% q-o-q) as more diversion projects completed compared to 1QFY22. This was partially offset by lower Central Office revenue (-12.6% y-o-y to S$4m) on a drop in rental space that reduced rental income.
  • Residential connection revenue remains the largest contributor to the group at 62% of revenue. As at 30 June 2022, there were 1.47m (+0.4% q-o-q) residential connections, 50.8k (+1% q-o-q) non-residential connections, 2.48m (+3.1% q-o-q) NBAP connections and 2.17m (+14.2% q-o-q) segment connections completed.

ICO pricing remains an overhang

  • The elephant in the room remains the IMDA review (estimated completion date: early 2023), which will determine the pricing of Netlink’s ICO (InterConnection Offer) services. We believe that ICO pricing will come under pressure given lower interest rates (as compared to 2017), a higher risk-free rate (RFR) environment and an increasing number of fibre connections.
  • High inflation reduces the attractiveness of dividend distributions as earnings growth will be limited. We are prudently below consensus as we reduce our FY23/24/25 PATMI forecasts for NetLink Trust by 4%/4%/2% and raise our cost of equity (COE) from 6.3% to 6.6% on a higher RFR assumption.

Upside muted; downgrade to HOLD

Kelvin Tan Maybank Research | https://www.maybank-ke.com.sg/ 2022-08-16
SGX Stock Analyst Report HOLD DOWNGRADE BUY 1.00 DOWN 1.050