NetLink NBN Trust - Phillip Securities 2022-11-06: Stable May Not Be Enough

NETLINK NBN TRUST (SGX:CJLU)

NetLink NBN Trust - Stable May Not Be Enough

NetLink NBN Trust (SGX:CJLU)'s 1H23 revenue and EBITDA were within expectations, at 52/53% of our FY23e forecasts. 1H23 DPU was 2.62 cents, an improvement of 2.3% y-o-y. See NetLink's announcements.
Residential fibre connections increased by 10,026 in 1H23 (1H22: +3,946). The jump follows the resumption of new home construction as restrictions were lifted. New connections are normalising to 20,000-25,000 p.a. in household formations.

We nudged up our FY23e EBITDA by 2% to account for the higher diversion revenue. Regulatory review of fibre prices is still ongoing with possible completion by the middle of next year.
Our base case is the regulatory review will have minimal impact on cash available for distribution as dividends.
Our NEUTRAL recommendation on NetLink Trust is maintained. The DCF target price is lowered to S$0.85 (previously S$0.96) as we raised our risk-free rate assumption.

Diversion revenue picked up as construction activity returned especially for MRT and other infrastructure activity. Margin on diversion revenue is around 35% against the group EBITDA margin of 73%.

1H23 finance cost jumped 42% to S$7.6mil. The effective interest rate has risen to 1.9% (1H22: 1.1%). Around 74% of the loans have been hedged at a fixed interest rate, namely the 5-year term loan of S$510mil was hedged at 1% til l May 2026.

Cash-flows will remain stable with residential connection revenue rising around 1 to 2% p.a. Regulatory review may lower fibre rates due to the expanded base of connections after the previous review.
Nevertheless continued CAPEX and a high WACC could keep any price changes minimal.

Limited growth in DPU will be a challenge in a rising interest rate environment. Investors will look towards a higher dividend yield as risk-free rates rise.
NetLink Trust's dividend yield spread over 10-year risk free has averaged 3.5% historically. It is now narrowed to 2.4%.
See

Paul Chew Phillip Securities Research | https://www.stocksbnb.com/ 2022-11-06

SGX Stock Analyst Report NEUTRAL MAINTAIN NEUTRAL 0.85 DOWN 0.960