Analysts from CGS International (CGSI), Maybank Securities and DBS Group Research are positive about NetLink NBN Trust despite the company reporting a lower y-o-y profit after tax of $25.7 million in 1QFY2025 ended June 30.
CGSI’s Ong Khang Chuen reiterates his “add” call with an unchanged target price of 95 cents, while Maybank’s Hussaini Saifee keeps his “buy” with an unchanged target price of 97 cents. The team at DBS has also kept its “buy” call with an unchanged target price of 98 cents.
Ong from CGSI likes NetLink for its resilient performance amid the revised interconnection offer (ICO) pricing which took effect from April 1, and its commitment to a stable distribution per unit (DPU) for FY2024-FY2026 despite the repricing.
The analyst notes that NetLink’s regulated revenues remained stable y-o-y in 1QFY2025, with strong residential connection growth offsetting the lower pricing.
Instead, Ong says that revenue decline was mainly driven by lower ancillary project revenue, a normalisation after two years of higher activity level, which is of a lower margin profile.
Excluding the impact from one-off items, the analyst says that NetLink’s core ebitda margin expanded by about 1.4% points y-o-y to 72.7% in the quarter.
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He highlights that NetLink’s 10 Gigabytes per second (Gbps) broadband plans are spurring transient growth in connections. The company added 17,000 residential fibre connections, forming about 80% of its FY2024 total net addition in residential connections.
NetLink says that this is due end-users switching to higher speed broadband plans but have yet to terminate their existing connections for lower speed plans, likely due to contract obligations, and could be more transient in nature.
The analyst notes that NetLink believes residential connection numbers continued to grow at a steady clip, in line with past quarters. Meanwhile, the group views the slight dip in non-building address points (-1.2% q-o-q) as a blip and continues to expect this segment to return to growth in coming quarters.
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Ong highlights that as at end June, NetLink’s net gearing remained healthy at 26.5%, and fixed rate borrowings accounted for 75.9% of outstanding loans. Its effective average interest rate stood at 2.69% in 1QFY2025, and management expects it to remain below 3%, he adds.
On that point, NetLink’s management has reiterated its commitment to stable distributions as long as its cash generation and debt position remain healthy. The analyst therefore forecasts a 6.3% dividend yield for FY2025.
Likewise, Maybank’s Saifee says that NetLink’s 1QFY2025 review is “stable on the surface”.
Besides the group’s stable Regulated Asset Base (RAB) revenue and increase in residential connections by over 17,000 due to 10Gbps fibre offering, the analyst notes that the non-building address point (NBAP) connections “surprisingly fell” 1% q-o-q.
“Management expects the rise in residential connections to reverse and expects growth momentum in NBAP connections to resume,” he adds.
The analyst trimmed his FY2025-FY2026 earnings forecasts by 1%-3% to factor in FY2024 results, mainly on the back of his higher depreciation and amortisation assumption by inputting higher FY2024 capex. HIs ebitda forecasts remain relatively unchanged.
Saifee sees NetLink as a bigger beneficiary when the interest rate cycle turns, as the stock has a 71% negative correlation to the 10-year US bond yield white its 6% dividend yield remains highly visible and stable.
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Finally, DBS’s analysts say that NetLink’s yield spread of 340 basis points (bps) is attractive compared to its last four-year average of 335 bps.
The Singapore government’s 10-year bond yield of 2.85% implies a yield spread of 340 bps.
They expect NetLink’s DPU to rise 1%-2% annually over the next few years, and the yield spread to narrow towards 250 bps, reflecting the resilient nature of its distributions.
Netlink’s 6.3% yield and resilient nature of its business is also a plus to the DBS team.
As at 11.05am, units in NetLink NBN Trust are trading flat at 84 cents.
