Analysts from CGS-CIMB Research and Maybank Securities have maintained their “buy” and “add” calls on Netlink NBN Trust, with unchanged target prices of $1.10 and $1.13 respectively.
To CGS-CIMB’s Ong Kang Chuen, Netlink reported a “solid set of numbers” for the 3QFY2022 ended December, with its results coming in line with consensus’ expectations.
On Feb 14, Netlink reported a 3QFY2022 net profit of $25.7 million, which is 4.1% higher y-o-y, despite a 1.2% y-o-y decline in revenue.
According to Netlink, the higher net profit was due to the faster growth in fibre connection revenues, which more than offset the lower revenues for Netlink’s diversion and central office segments. Its residential segment saw 7,000 net additions, reaching 1.46 million connections, up 1% y-o-y and 0.5% q-o-q.
Non-residential connections also saw stronger additions, and now stand at 49,800, which is up 1.4% q-o-q and 3.7% y-o-y.
In his Feb 16 report, Ong notes that despite lower government grants, Netlink’s EBITDA remained flattish y-o-y in 3QFY2022 given the stronger performance in the fibre business segment, which has a higher margin profile. The company’s EBITDA for 3QFY2022 climbed 0.1% y-o-y to $70.2 million.
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The way Ong sees it, Netlink’s bright spot is its non-building address point (NBAP) segment, which is the fastest growing with 3,962 total connections in 3QFY2022, increasing 8% q-o-q, and 68.4% y-o-y.
This is due to Netlink supplementing local telcos’ rollout of 5G infrastructure and smart nation linked initiatives.
Maybank’s Kelvin Tan adds that Singapore remains on track in its 5G rollout plan, as well as government agencies’ projects to digitalise outdoor locations.
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While Tan broadly agrees with CGS-CIMB’s Ong’s observations, he also thinks that the NBAP segment is likely to see sustained growth momentum, especially with Singapore smart nation initiatives.
“These trends will accelerate well with increasing P2P connections and more diversity connections from data centres come through,” he adds.
He does highlight that nevertheless, residential revenue remains Netlink’s core driver, making up about 62.5% of revenue.
This is largely in line with its focus on improving take-ups from first-time fibre users and connecting low-income households via IMDA’s Home Access program.
As such, Tan also sees Netlink as a “safe dividend play”, adding that “given the resiliency of the business model, it continues to explore potential inorganic growth opportunities in telecoms infrastructure that are likely to generate a stable cashflow.”
Netlink has gross debt/EBITDA of 2.6 times and a cash balance of $113 million as of Dec 31, 2021, and he believes Netlink should have “sufficient headroom” to drive its acquisition ambition without compromising dividends.
“With 93% of revenue from recurring cashflow, we believe Netlink’s 5.6% dividend yield offers an attractive spread even as interest rates rise,” Tan adds.
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Despite the rosy outlook, one key focus that investors should take note of, Ong highlights, is the outcome of NLT’s negotiations with Infocomm Media Development Authority (IMDA) on the interconnection offer (ICO) pricing for the next review period (2023-2027).
The ICO pricing governs the prices set for some of Netlink’s services, such as those related to residential connections, non-residential connections, NBAP and segment fibre connections, as well as ducts and manholes service revenue.
He conservatively prices in a 5% reduction in ICO pricing, due to the increase in number of fibre connections, but believes that Netlink’s strong operating cash flow generation can continue to support stable DPU growth of 1.5% per annum without meaningfully impacting its debt profile.
In a Feb 17 report, OCBC's research team also maintains their "buy" rating on Netlink, although they lower their fair value from $1.10 to $1.06.
The team thinks that there is a "good uptick in fiber connections", and believes that management continues to be on the lookout for new investment opportunities that exhibit stable cashflows within the telecoms infrastructure space.
However, they also highlight that in the near-term, there could be a slight overhang, given uncertainty over the outcome of the regulatory pricing review for 2023-2027.
On Feb 17, shares of Netlink are closed at 97 cents, with a FY2022 price to book ratio of 1.4 and dividend yield of 5.5%, according to Maybank.
