The analysts at Maybank Securities, Citi Research and OCBC Investment Research (OIR) are all keeping their “buy” calls on NetLink NBN Trust following the group’s 1HFY2025 ended Sept results.
While Maybank Securities analyst Hussaini Saifee has kept his target price of 97 cents unchanged, Citi Research’s Luis Hilado and Arthur Pineda as well as the OIR team have respectively raised their target prices of $1.03 from $1.00 previously and their fair value to $1.01 from 97 cents previously.
Meanwhile, PhilipCapital analyst Paul Chew has kept his “neutral” call and target price of 87 cents unchanged.
Netlink’s 2QFY2025 earnings fell 11% y-o-y, partly due to a 4% y-o-y drop in earnings before interest taxes and depreciation (ebitda), while revenue grew 3% y-o-y.
Similarly, 1HFY2025 earnings fell by 8% y-o-y and 4% q-o-q, which Saifee notes stems partially from higher taxes and a slight ebitda softness following an absence of a one-off gain from a disposal of assets recorded in 1HFY2024.
He continues: “1HFY2024 revenue was stable despite the lower regulatory pricing kicking in from April. Despite reported earnings decline in 1HFY2025, the company declared a 1% increase in dividend of 2.68 cents, translating to an attractive annual yield of 6%.”
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Meanwhile, the group posted a stable regulated asset base (RAB) revenue y-o-y despite reduction in its regulated pricing from April.
Netlink’s residential connections declined by 4,000 in 2QFY2025, but this was partially due to a reversal from 17,000 in 1QFY2025, which Safee attributes to a promotion launched by telcos’ of 10 gigabytes per second (Gbps) fibre, as well as WiFi router offerings. Furthermore, in the 2QFY2025, lower speed contract termination came with a lag.
Non-residential connections similarly declined by 200, largely due to churn between requesting licensees (RLs) with delayed terminations and RL consolidation.
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“On the other hand, non-building address point (NBAP) connections surprisingly made a decent comeback posting 2% q-o-q growth. Segment connections maintained its strong momentum, up 4% q-o-q. NBAP and segment connection growth is supported by smart nation and cloud-based services linked deployments,” writes Saifee.
Netlink’s operation and maintenance costs were also up 5% y-o-y from increased fibre splicing costs while installation costs rose 44% y-o-y from higher residential connection orders.
The Maybank analyst writes: “We think cost increases were temporary in nature and should largely move in-sync with revenue growth.”
“Netlink’s revenue and cash flows are resilient and well supported by a stable business model. We see Netlink as a bigger beneficiary as and when the interest rate cycle turns,” continues Saifee.
He adds that the stock has 71% negative correlation to the 10-year US bond yield while its 6% dividend yield remains highly visible and stable.
Upside factors noted by him include stronger-than-expected demand which could enable NetLink to increase its regulated capital expenditure (capex), the acceleration of office decentralisation from the central business district (CBD) area, and a higher-than-expected residential household broadband penetration rate.
Other upside factors include market risk-aversion which could boost investment interest in NetLink given its defensive and stable business, while a low interest rate environment could cause yield compression for the stock.
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Conversely, downside factors include a reduction in regulated returns for the group’s next review period which would impact long-term fair value, pricing competition in the non-residential segment and lastly, a rising interest rate cycle.
Meanwhile, Citi’s Hilado and Pineda write: “We note positively that distribution per share (DPS) of 2.68 cents is likely a beat of consensus at 53% (51% of Citi) as historically 1HFY2025 DPS is exactly half of the full year.”
The analysts add that their raised target price comes from lower 10-year Singapore rates.
“Trading above 1 standard deviation (s.d.) over its long-term dividend yield mean of 5.7% we remain a ‘buy’ on the stock where a higher for longer rate outlook would be the key risk to performance,” write Hilado and Pineda.
On connection numbers, the OIR team also notes: “With Singapore telcos offering attractive 10Gbps broadband upgrade plans, we could see quarterly fluctuations in connection numbers to persist in the coming quarters.”
They add that as at end Sept, Netlink’s net gearing was healthy at 25.3% while effective average interest rate remained low at 2.7%.
Potential catalysts noted by the team include a significant growth in fibre end-user connections, higher-than-expected distribution payout as well as earnings-accretive merger and acquisition (M&A) opportunities.
On the other hand, investment risks include a regulation of service pricing by the Infocomm Media Development Authority (IMDA) subject to review every five years, fibre technology becoming obsolete in the future and lastly, potential disruptions from potential pandemics.
Finally, PhillipCapital’s Paul Chew expects incremental growth in dividend per unit (DPU) for NetLink’s FY2025.
He concludes: “Cash flows this year are under pressure from lower residential connection prices and higher capex for the new central office. The additional capex, plus related interest expenses, places a near-term burden on cash available for distribution. NetLink benefits longer-term, and it generates a return on this capex through the regulated pricing of its fibre connections.”
As at 2.32 pm, units in Netlink are trading 1 cent lower or 1.10% down at 90 cents.
