NetLink NBN Trust - OCBC Investment 2022-08-17: In-line Results; Awaiting Regulatory Decision


NetLink NBN Trust - In-line Results; Awaiting Regulatory Decision

  • NetLink NBN Trust's 1QFY23 EBITDA at 25.8% of our full-year forecast; firm growth in residential and non-residential connections
  • Ambiguity over WACC that regulator will adopt; management has been sharing recent data points that could make for a more positive outcome
  • Maintain fair value estimate of S$1.07 for NetLink NBN Trust.

NetLink reported In-line 1QFY23 quarter

  • NetLink NBN Trust (SGX:CJLU)’s 1QFY23 results were broadly in-line with our expectations. Revenue grew 4.8% y-o-y to S$97.9m, on the back of higher ancillary project revenue, connections revenue and co-location revenue, though partially offset by lower Central Office Revenue. Residential and non-residential fibre connections growth were firm, increasing ~6k and ~0.5k q-o-q, respectively.
  • EBITDA grew 5.0% y-o-y to S$73.0m (broadly in-line with revenue growth), which formed 25.8% of our full-year forecast.

Business update

  • Management noted that 2 Gbps services (2 x 1 Gbps connections) offered by some telcos to households actually do not require NetLink to provide a second fibre, and hence the increase of ~6k residential connections over the quarter was largely due to new household formations.
  • We also understand that negotiations for the Regulatory Price Review are still underway, and that a pricing reset could come in early 2023 or even extend into middle of the year. Management shared that the unit prices for residential connections might drop, given that the average number of connections forecasted for the upcoming review period will increase. However, what is more pertinent is the target regulated revenue that NetLink is allowed to earn, with a key component of this being the weighted average cost of capital (WACC) assumption used.
  • NetLink's management has been sharing both actual and forecasted data on a wide variety of metrics, such as contractor rates (which has increased significantly due to inflation) and interest rates. Fibre costs have increased, but on a steadier basis.
  • On the decline in Central Office revenue, management noted that 1QFY23 levels could indeed be the general run-rate for the year, but they are examining alternative uses for the space that Singtel has given up.
  • On the other hand, management also expects a lot more diversion projects to be undertaken and completed this year, and thus ancillary project revenue could remain elevated.
  • Of NetLink's S$666m gross debt as of 1QFY23, 76.6% of borrowings are now on fixed rate; management continues to monitor for opportunities to fully hedge its debt. We note that S$156m of revolving credit facilities (RCF) will be maturing in March 2023 and will be refinanced in FY23.
  • On M&A, NetLink's management mentioned that they are not in a hurry given valuations of potential targets remain high. In a rising rate environment, management believes that valuations may come down and they remain in a watch-and-see mode for now.

Maintain BUY on NetLink Trust

OCBC Research Team OCBC Investment Research | https://www.iocbc.com/ 2022-08-17
SGX Stock Analyst Report BUY MAINTAIN BUY 1.070 SAME 1.070