NETLINK NBN TRUST (SGX:CJLU)
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
- We believe that share price will remain in suspended mode as the group waits for regulatory to complete the public consultation process. On possible inorganic growth, NetLink Trust's management remains patient in looking for undervalued opportunities, while taking a cautious stance amid market volatility.
- See
- We remain cognisant of NetLink Trust’s profile as a high-yield, safe haven stock. NetLink Trust’s robust operating cashflow, attractive yield, and resilient business model keep us supportive of the name.
Kelvin Tan
Maybank Research
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https://www.maybank-ke.com.sg/
2022-08-16
SGX Stock
Analyst Report
1.00
DOWN
1.050
