FIBRE-OPTIC owner NetLink NBN Trust : CJLU 0% posted a decline in its profit after tax by 9.1 per cent to S$25.7 million for the first quarter ended Jun 30, down from S$28.2 million in the same period last year.

 

In a bourse filing on Friday (Aug 2), NetLink&rsquo s trustee-manager said this was mainly due to lower earnings before taxes, interest, depreciation and amortisation (Ebitda) and higher depreciation from a higher asset base.

 

Revenue for the quarter was lower by 2.9 per cent at S$100.9 million, when compared with the corresponding period a year ago. The fall of about S$3 million was due to lower non-regulated asset base (non-RAB) revenue from the trust&rsquo s ancillary projects.

 

The manager added that RAB revenue remained stable during the quarter as higher connection numbers offset the impact of lower prices for key services, which took effect from Apr 1 this year.

 

For the Ebitda, NetLink&rsquo s bottom line was down 2.4 per cent at S$73.4 million, mainly due to lower non-operating income and higher operating expenses. In Q1 of the last financial year, there was also a S$1.1 million one-off gain on disposal of assets included in the non-operating income, it said.

 

As at Jun 30, there were 1.52 million residential connections, up from 1.49 million from the corresponding period a year ago. NetLink said the growth was in part due to new connections from end-users switching to higher-speed broadband plans but had yet to terminate their existing connections for lower-speed plans.

 

The number of non-residential connections grew from 52,522 to 53,382, year on year.

Why is fibre most environmentally friendly.?

On May 23, NetLink NBN Management executive director and CEO, Tong Yew Heng, acquired 100,000 units of NetLink NBN Trust : CJLU 0% at S$0.865 per unit. This increased his direct interest in the business trust from 850,000 units to 950,000 units.

 

His preceding acquisition was in February, with 100,000 units acquired at S$0.845 per unit.   

On Feb 16, NetLink NBN Management executive director and CEO, Tong Yew Heng, acquired 100,000 units of NetLink NBN Trust : CJLU -1.18% at S$0.845 per unit. This increased his direct interest in the business trust from 750,000 units to 850,000 units. His preceding acquisition was in December 2023 at S$0.835 per unit, and prior to that at S$0.97 per unit, back in October 2020. The price-to-book ratio of NetLink NBN Trust was around the 1.3 times level at the time of all three acquisitions.

 

Tong has been the CEO of the trustee-manager since January 2016 and is responsible for the overall leadership and performance of the trust. Prior to joining NetLink Trust as CEO in 2016, he was the executive vice-president, corporate & market development, for Singapore Technologies Electronics. Before that, Tong was the CEO of CitySpring Infrastructure Trust, now known as Keppel Infrastructure Trust.

 

With a market capitalisation of S$3.3 billion, NetLink NBN Trust has ranked among the 50 most traded Singapore stocks this year and just outside the 50 Singapore stocks that booked the highest net institutional inflow this year.

 

The business trust also presently maintains a 6.2 per cent dividend yield at a unit price of S$0.844, while the Refinitiv consensus estimate target price is S$0.978 as at Feb 21. Refinitiv consensus estimates represent the average of individual estimates provided by analysts covering the stock and estimates typically represent an analyst&rsquo s opinion of the company performance over the next 18 months. On Feb 6, the trustee-manager provided a business update for its 9MFY24 (ended Dec 31), highlighting that its revenue increased by 3.2 per cent, compared to its 9MFY23. This was mainly attributed to higher connection revenue across all segments and higher installation-related revenue.

 

The business trust maintains a multipronged strategic focus. This first includes improving network reach, densification, and capability in support of NetLink&rsquo s fibre-to-anywhere (FTTX). In line with the FTTX strategy, the trustee-manager noted last year that NetLink NBN Trust&rsquo s next phase of growth also requires it to efficiently support the deployment of IoT and other devices fitted on street furniture such as traffic lights, lamp posts and bus stops. The second port of call in the strategic focus involves the improving competitiveness of NetLink&rsquo s fibre in the enterprise and government segments. Other areas of focus include providing expertise and infrastructure to support the upgrade of the Nationwide Broadband Network, exploring opportunities to invest in telecoms infrastructure businesses overseas which are likely to generate a stable cashflow, and create brand affinity with end-users.

 

Analysts at CGS-CIMB Research, UOB Kay Hian and DBS Group Research have maintained their &ldquo add&rdquo and &ldquo buy&rdquo calls on Netlink NBN Trust following the trust&rsquo s 3QFY2024 ended December announcement of results that are within their expectations.

 

CGS-CIMB analyst Ong Khang Chuen highlights that Netlink saw further growth across all its fibre segment connections. Notably,residential fibre, which accounts for 60% of the revenue contribution, added 9,000 connections during the quarter, surpassing 1HFY2024&rsquo s 7,000 new connections. 

 

Armed with predictable revenue streams, Netlink remains cognisant of the company' s profile as a high-yielding, safe haven stock, UOBKH analysts Chong Lee Len and Llelleythan Tan notes. As such, key criteria of any potential new investment in the near horizon would have to include country risk premium and a preferably stable cash flow via an asset sale and leaseback model. 

 

&ldquo Importantly, Netlink has sufficient debt headroom (24.3% net gearing) to drive its acquisition ambition without compromising on cash flow and dividends. There is, however, no fixed timeline in terms of mergers and acquisition activities and management may even consider a joint venture or consortium outfit in its acquisition strategy,&rdquo they point out.

 

NLT&rsquo s revised interconnection offer pricing for the next five years will take effect from 1 Apr 2024. However, the analysts note that the revised prices would not have a material impact on Netlink&rsquo s FY2024 DPU as well as FY2025-FY2026 DPU and earnings. 

 

Meanwhile, DBS analysts say Netlink&rsquo s yield spread of 331 basis points is still attractive compared to its 3-year average 324 basis points. The Singapore government&rsquo s 10-year bond yield of 3% implies a yield spread of 331 basis points, higher than the last 3-year average of 324 basis points. 

The analysts expect Netlink&rsquo s DPU to rise by 2% annually over the next few years and for the yield spread to narrow towards 250 basis points to reflect the resilient nature of its distributions.

 

CGS-CIMB, UOBKH and DBS are keeping their target prices at 95 cents, $1.01 and 98 cents respectively. 

 

Netlink NBN Trust has delivered 4% higher profit after tax for its 9MFY2024 ended December at $85.1 million, compared to $81.8 million recorded in the previous corresponding period.

 

Revenue for the period increased by 3.2% to $309.4 million, mainly due to higher connection revenue across all segments and higher installation-related revenue. This was partially offset by higher operating costs.

 

Ebitda for 9MFY2024 stood at $228.5 million, 3.9% higher y-o-y due to higher revenue and one-off reversal of operating costs following a resolution of disputed power charges.

 

As at December 2023, the trust&rsquo s gearing stood at 24.3% and a weighted average debt maturity of 2.7 years.

 

Moving forward, the company&rsquo s strategic focus includes exploring opportunities to invest in telecoms infrastructure businesses overseas, which are likely to generate a stable cash flow.

 

The Infocomm Media Development Authority (IMDA) announced on Nov 27 the results of its review of the wholesale prices, terms and conditions of Netlink NBN Trust&rsquo s interconnection offer (ICO) for the next five years. This has removed a months-long overhang on the fibre network infrastructure operator, and analysts are relieved at the &ldquo long-award closure&rdquo .

 

Revised prices, which will take effect from April 1, 2024, are lower for residential and non-building address point (NBAP) connections, down 2% to $13.50 and 4% to $70.50 respectively. Non-residential end-user connection prices, meanwhile, will remain unchanged at $55.00 per month.

 

Pricing terms are regulated using the Regulated Asset Base (RAB) framework, which allows Netlink to recover return of capital deployed, return on capital employed and operating expenditure. The weighted average cost of capital (WACC) determined by IMDA for this review period is held stable at 7%. Both IMDA and Netlink may propose to conduct a mid-term price adjustment in the third year, in the event of any significant changes to cost or demand forecasts due to unforeseen circumstances. 

 

Outcome ' slightly better than expected'

 

CGS-CIMB Research analyst Ong Khang Chuen thinks the review outcome is &ldquo slightly better than expected&rdquo . He had assumed a 2% reduction in Netlink&rsquo s residential ICO pricing and a 5% reduction for non-residential and NBAP connection pricing, given a higher number of active fibre connections.

 

In a Nov 27 note, Ong maintains his &ldquo add&rdquo call on Netlink with an unchanged target price of 95 cents. &ldquo We think the latest development removes a key overhang on NLT&rsquo s share price for the past year, and we think it strengthens our investment thesis of NLT as a defensive amid macro uncertainties, given strong distribution per unit (DPU) visibility.&rdquo

 

Ong likes Netlink&rsquo s strong operating cash flow generation, which should continue to support &ldquo stable&rdquo DPU growth of 2% per annum through to FY2030 &ldquo without meaningfully impacting its debt profile&rdquo . He forecasts DPU of 5.3 cents for FY2024 ending March 2024, which represents a 6.5% dividend yield. 

 

Netlink pays distributions semi-annually. For FY2023, Netlink paid distribution per unit (DPU) of 5.24 cents, marking another increase since its IPO in 2017. In FY2018, FY2019, FY2020, FY2021 and FY2022 Netlink&rsquo s DPU was 3.24 cents, 4.88 cents, 5.05 cents, 5.08 cents and 5.13 cents respectively.

 

&lsquo Very attractive&rsquo yield

 

Similarly, DBS Group Research had projected much more aggressive cuts. &ldquo Given that risk-free rate has risen to 3.0% compared to 2.1% seen at the time of its IPO in 2017, we had expected a 20-30 basis points (bps) rise in the regulatory return&hellip [However,] Netlink has been allowed a regulatory return of 7%, same as last term, for a five-year period from April 2024.&rdquo

 

DBS is maintaining &ldquo buy&rdquo on Netlink with an unchanged target price of 98 cents, slightly higher than that of CGS-CIMB&rsquo s Ong. &ldquo We don&rsquo t see any impact on its FY2024/2025 distributions, which might rise by 1%-3% annually and can be sustained in the long-term.&rdquo

 

Netlink is trading at 6.5% yield at 350 bps spread over Singapore&rsquo s risk-free rate, which is &ldquo very attractive&rdquo , says DBS. &ldquo Netlink&rsquo s 6.5% yield is also higher than 5.8% average offered by industrial REITS despite Netlink&rsquo s much longer asset life, as Netlink incurs capex each year to maintain/enhance its regulated asset base.&rdquo

 

&lsquo Near-term share price weakness&rsquo

 

While Netlink has a long runway, UOB Kay Hian Research analysts Chong Lee Len and Llelleythan Tan expect near-term share price weakness &ldquo as total returns in the near term are adversely affected by the review [compared to] expectations of higher returns to compensate for elevated interest rates environment and expected higher cost base from inflationary pressures&rdquo .

 

Netlink may propose to conduct a mid-term price adjustment in the third year of the pricing period, or FY2027, note Chong and Tan. &ldquo Management noted that upcoming expected interest rate cuts in the short term alone would not trigger a mid-term adjustment and the group would look at other factors, such as opex/capex plans, before triggering a review.&rdquo

 

They expect the fall in prices for residential and NBAP connections to have an &ldquo insignificant&rdquo impact on FY2025-2026 earnings. &ldquo The $0.30 price reduction for residential connection implies a loss of around $5 million in annual revenue and would reduce our current FY2025-2026 PATMI estimates by only 1%-2%.&rdquo

 

They add: &ldquo Furthermore, given that Netlink has been adding roughly 20,000 new residential connections per year, we expect new revenue contributions of roughly $2 million to partially offset the $5 million drop in revenue loss before returning to pre-price reduction levels by 1HFY2026.&rdquo

 

Dividends will remain unaffected, say Chong and Tan. &ldquo Armed with strong annual operating cash flows of around $300 million, management noted that the group expects distributions to stay stable despite lower revenue contributions from the residential connections segment. Also, despite higher capex commitments in FY2024-2025, the group noted that additional capex net from its surplus cash after distribution would be borrowed, backed by the group' s strong balance sheet, with low 21.5% net gearing.&rdquo

 

Hence, Chong and Tan maintain &ldquo buy&rdquo on Netlink with an unchanged target price of $1.01. 

 

Citi&rsquo s target price leap

 

Finally, Citi Research analysts Luis Hilado and Arthur Pineda had anticipated much worse cuts of 8% for the review. Now, they have revised up their revenue and profit forecasts for FY2024/2025 by 4%/6% and 6%/13%, respectively. 

 

In a Nov 27 note, the Citi analysts maintain &ldquo buy&rdquo on Netlink with a higher target price of $1.06, from 99 cents previously. This is the highest target price among the four research houses mentioned here. 

 

&ldquo We have conservatively not assumed a rate increase within the next five-year window,&rdquo write Hilado and Pineda. &ldquo Even without such assumption, our revised target price provides healthy returns with at least five years of sustainable yield of over 6%.&rdquo