Analysts at DBS Group Research, Citi Research, CGS-CIMB Research, Maybank Securities and UOB Kay Hian are all maintaining their “buy” and “add” calls on NetLink NBN Trust, while PhilipCapital maintains its "neutral" call. DBS, Citi, CGS-CIMB, Maybank and PhilipCapital have also kept their target prices unchanged at 98 cents, 99 cents, 95 cents, 97 cents and 87 cents respectively while UOB Kay Hian has lowered its target price to $1.01 from $1.05 previously.
On Nov 3, Netlink reported a distribution per unit (DPU) of 2.65 cents for the 1HFY2024 ended September, 1.1% higher y-o-y.
For the team at DBS, Netlink’s 2QFY2024 earnings before interest, taxes, depreciation and amortization (ebitda) of $73.9 million, which fell by 1.7% q-o-q but rose by 1.9% y-o-y stood in line with its expectations. Netlink’s 1HFY2024 DPU also came within the team’s expectations as well as that of the consensus.
Netlink’s 2QFY2024 ebitda margin stood at 72.9%, against its previous ebitda margin of 72.4% in 1QFY2024.
Netlink’s 2QFY2024 revenue, which fell by 2.4% q-o-q and 0.3% y-o-y to $101.4 million, also met the expectations of the consensus. The q-o-q drop in revenue was due to Netlink’s lower co-location, ancillary and central office revenues.
“Residential connection continues to be the key contributor at 61% of revenue in 2QFY2024, which was 59% in 1QFY2024. In 2QFY2024, Netlink’s residential fibre connection increased to 1.492 million from 1.489 million in 1QFY2024 while non-residential fibre connections increased to 52,600 from 52,500,” writes the team of analysts at DBS.
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The REIT’s 2QFY2024 net profit was $24.7 million which was 13% lower q-o-q and 8.4% lower y-o-y, meeting consensus expectations.
The DBS team notes: “The q-o-q decline in net profit was largely attributable to the rise in finance cost by 39% q-o-q to $6.3 million. Netlink’s average interest rate in 1HFY2024 has risen to 2.64% from 1.92% in 1HFY2023 with around 70% of total debt hedged till FY2026.”
Netlink is also incurring an additional capital expenditure (capex) of $120 million for its new central office, which will be “largely incurred” during FY2024. To the DBS team, the higher capex implies a higher regulated asset base and higher ebitda growth. “Netlink’s net debt to ebitda of around 2x implies a big headroom to raise debt,” continues the team at DBS.
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They add that there has been a delay in finalising its weighted average cost of capital (WACC) for the period from January 2023 to December 2027, which could be due to “volatile risk-rate” in the team’s view.
They write: “Current risk-free rate of 3.2% is significantly higher than 2.1%, seen at the time of its initial public offering (IPO) in FY2017. So we expect the regulatory WACC to be higher than the current 7.0%. We estimate every 10 basis points (bps) change in regulatory WACC to have an additional 1% impact on its ebitda.”
Notably, the Singapore government’s 10-year bond yield of 3.23% implies a yield spread of 319 bps, which is below its three-year average spread of 332 bps, but higher than the last two-year average of 300 bps.
The team at DBS expects Netlink’s DPU to “rise by 2% annually over the next few years”, and the yield spread to “narrow towards 250 bps”, to reflect the “resilient nature” of the trust’s distributions.
Compared to industrial REITs, which usually offer high yields due to their shorter asset life, the DBS analysts notes that Netlink exhibits a much longer life as it incurs capex each year to maintain its regulated asset base.
“Hence, Netlink should be trading at a lower yield than the industrial REITs in our view. Netlink is currently trading at 6.4% compared to the industrial REIT average of 5.8%,” the team adds.
Meanwhile, Citi analysts, Luis Hilado and Arthur Pineda, note that Netlink’s 1HFY2024 results stood in line with their expectations, but the same key issue remains.
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In their report dated Nov 3, Hilado and Pineda said that the stable state growth of the REIT’s core residential and non-residential connection businesses in 1HFY2024 was “not surprising”, as was the continued y-o-y double-digit growth in non-building address points (NBAP) and segment revenues.
Hilado and Pineda note: “Volatility, as per normal, came from project-based revenue sources such as installation and diversion/ancillary projects.”
Meanwhile, the lack of visible developments on the long-delayed rate re-basing decision remains to be the key overhang on Netlink’s performance, according to the analysts, who note that there continues to a lack of mention on the status of the interconnection rate re-basing resolution and schedule by the Infocomm Media Development Authority (IMDA).
In a separate report on Nov 6 following Netlink’s management’s briefing, the analyst said that the company is hopeful of a decision being rendered before the end of 2023.
Hilado and Pineda understand that the key medium-to long-term development the market will “seek to determine” Netlink’s future cash flows and support for its healthy dividend yield, and will continue to be insight on the next five-year rate regime.
“We believe consensus is generally assuming no changes, against Citi assuming an 8% cut on a full-year basis, but that the market is seemingly pricing in a far larger cut,” conclude the analysts in their Nov 3 report.
“[However], we continue to believe that as long as the rate movement is not an extreme cut, the announcement will likely provide the relief needed for the share price to perform anew as it provides a base level of confidence of the sustainability of DPU payments for at least the next five years,” they add in their Nov 6 report.
Netlink’s results stood in line with the Citi analysts’ expectations.
CGS-CIMB’s Ong Khang Chuen, like the rest of his peers, deem Netlink’s results to be in line with his estimates.
On the wait for the conclusion of the ICO regulatory review, Ong has assumed a 2% reduction in the trust’s residential ICO pricing for the next review period in his forecast, given a higher denominator due to a higher number of active fibre connections. That said, he believes Netlink’s strong operating cash flow generation should continue to support stable DPU growth without meaningfully impacting its debt profile.
“We like Netlink as a defensive play amid macro uncertainties, given its strong DPU visibility,” he writes.
Re-rating catalysts include earnings-accretive acquisitions and stronger NBAP connections growth as Netlink benefits from telcos’ 5G rollout, while downside risks include a lower-than-expected ICO pricing in the upcoming review.
Maybank Securities’ Krishna Guha also deemed Netlink’s earnings for the 1HFY2024 to be in line with his expectations.
“Although the stock’s performance remains lacklustre as investors wait for the result of the regulatory review (likely to be announced before end-2023), we continue to see NetLink Trust as a defensive shelter amid macro uncertainty, given its strong earnings visibility and stability,” he writes.
“We believe Netlink is well positioned for the next phase of growth in NBN (2.0) as the Singapore government looks to upgrade the nation’s connectivity infrastructure to support broadband speeds of up to 10GBps,” he adds. “Upgrades may have to be put in to fulfil power, cooling and space requirements in Netlink’s CO, which would in turn grow its regulatory asset base. Importantly, Netlink has sufficient headroom to fulfil its acquisition ambitions without compromising cash flow and dividends. Net gearing remains healthy at 21.5% (as at Sept 30), providing ample room to increase group debt.”
Based on Guha’s estimates, Netlink offers a prospective dividend yield of 6.3%.
The analyst at PhilipCapital, Paul Chew, adds that capex expenditure will be elevated for the next two years due to Netlink's new $100 million Seletar colocation facility.
"This is to upgrade broadband capacity nationwide from 1GBps to 100 GBps. It will require investments in cooling and power equipment and space in the co-location sites," writes Chew.
Meanwhile, Netlink came slightly below the expectations of UOB Kay Hian’s Chong Lee Len and Llelleythan Tan due to higher finance costs.
However, they still see the counter as a safe haven with an attractive dividend yield of 6.3%.
“Armed with predictable revenue streams, management remains cognisant of the company's profile as a high-yielding, safe haven stock. 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. Importantly, Netlink has sufficient debt headroom (21.5% net gearing) to drive its acquisition ambition without compromising on cash flow and dividends,” say Chong and Tan.
“There is however, no fixed timeline in terms of mergers and acquisition (M&A) activities and management may even consider a joint venture or consortium outfit in its acquisition strategy,” they add. “Netlink sees growth opportunities arising from the digital economy, 5G rollout, connectivity into data centres and Singapore’s Smart Nation initiatives.”
On the back of higher interest costs, the analysts have cut their FY2024 - FY2026 earnings estimates with FY2024 patmi now at $107.6 million down from $119.5 million; FY2025 patmi at $118.8 million from $131.3 million and FY2026 patmi at $128.8 million from $142.8 million.
Units in Netlink closed 0.5 cents higher or 0.6% up at 84.5 cents on Nov 7.
