Analysts are mixed on Netlink NBN Trust’s prospects after the group reported a distribution per unit (DPU) of 2.62 cents for the 1HFY2023 ended Sept 30, up 2.3% y-o-y.
The group’s revenue for the six-month period rose 36.1% y-o-y to $54.6 million, surpassing consensus estimates, as well as that of Citi Research’s estimates. The higher y-o-y revenue was attributable to residential connections, which remained the key contributor to the group’s overall revenue.
Citi Research’s Luis Hilado has retained his “buy” call with a higher target price of 95 cents, from 91 cents previously.
The analyst had upgraded his call on the stock to “buy” on Oct 26 as he sees the negatives as likely to be priced in.
At the time, Hilado deemed that Netlink’s sharp decline “appears to have more than fully factored in interconnect rate cuts in 4QFY2023 while discounting consensus estimates.”
According to the analyst in his Nov 3 report, the call with Netlink’s management provided insights into two accelerative developments for Netlink.
“[First], the ancillary/diversion revenue that provided the 1HFY2023 positive surprise has a healthy pipeline and outlook; and [second], any interconnect rate changes will not be retroactive to January 2023,” Hilado writes.
These updates have led the analyst to raise his revenue estimates for the FY2023 and FY2024 by 6% and 5% respectively. Hilado has also upped his ebitda and profit forecasts for the FY2023/FY2024 by 4%/2% and 10%/6% respectively.
“The largest component to the changes being the more than doubling of ancillary/diversion revenues which now represent 7% to 8% of total revenues from 3% in FY2022 and prior years,” he writes.
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“Our FY2024 remain below the latest Bloomberg consensus as we believe most have not assumed any rate cuts,” he adds. “Although we maintain an 8% rate cut outlook, our 6% raised target price of 95 cents implies a healthy return and hence we maintain our ‘buy’ on the stock.”
Concurring with Hilado, Maybank Securities analyst Kelvin Tan believes Netlink’s short-term negatives are likely priced in, and the stock’s sharp decline appears to have fully factored in the anticipated interconnect rate cuts while discounting estimates. Tan has upgraded his call on Netlink to “buy” with a higher target price of $1.02 from $1 previously.
DBS Group Research analyst Sachin Mittal, on the other hand, has downgraded his call on Netlink to “hold” from “buy”.
At Netlink’s current prices, Netlink is trading at a 12-month forward distribution yield of 6.2%, which is deemed “fair”, in Mittal’s view.
“Given that Singapore government’s 10-year bond yield has risen to 3.45%, [Netlink’s current share price] implies a yield spread of 270 basis points (bps) compared to its 3-year average yield spread of 370bps. However, we expect Netlink’s DPU to rise annually by 2% over the next few years, and the yield-spread to narrow towards 250 bps, reflecting resilient nature of its distributions,” Mittal writes.
On the back of his recommendation downgrade, Mittal has also lowered his target price to 90 cents from $1.05. “We model 250 bps yield-spread assuming risk-free rate of 3.5%, to arrive at a target 12-month forward distribution yield of 6.0% [on 12-month forward DPU of 5.40 cents]. This translates to a target price of 90 cents.”
In his report dated Nov 3, Mittal feels that the high inflationary environment should not eat into Netlink’s distributions.
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“Inflationary pressures on capex and opex are taken into consideration under the Regulated Asset Base (RAB) model,” he explains. “We expect the regulatory weighted average cost of capital (WACC) for Netlink to be raised for the next review period over January 2023-December 2027 due to sharp rise in the risk-free rate.”
Despite the potential rise in regulatory WACC, Mittal sees that Netlink may raise its distributions by only 2%-3% in the FY2024. “[This is as] it focuses on sustainability of its distributions over the long term,” he says.
“We estimate every 10-bps change in regulatory WACC to have a +1% impact on its ebitda and we estimate [a] 50 basis points hike in regulatory WACC,” he adds.
In Mittal’s view, any sharp rise in risk-free rate from 3.5% may lead to the market expecting a higher distribution yield from Netlink. The group’s yield-spread hovering around 300 bps-350 bps is another key risk, he says.
Shares in Netlink closed 1.5 cents higher or 1.73% up at 88 cents on Nov 3.
