Analysts are remaining mostly positive on Netlink NBN Trust CJLU after its update for the 9MFY2023 ended Dec 31, 2022.
Maybank Securities analyst Kelvin Tan kept his “buy” call after the trust’s “stable” results for the nine-month period.
Based on Tan’s estimates, Netlink’s 9MFY2023 profit after tax (pat), which rose 24.3% y-o-y to $81.3 million came in ahead at 79% of his full-year forecast. Netlink’s 9MFY2023 pat stood in line with the consensus estimates at 75% of their forecasts.
Despite the positives, Tan has lowered his target price estimate to 95 cents from $1.02 as he expects the regulatory weighted average cost of capital (WACC) under review for Netlink to be higher as inflationary pressure on capital and operational expenditure would be taken into consideration under the regulatory asset base (RAB) model.
“In our view, current inflationary pressure should improve WACC under the regulatory asset base RAB model and we are projecting [Netlink’s] distribution per unit (DPU) to rise by 1.8% per annum (p.a.) in the next few years,” Tan writes.
The analyst has also made adjustments to his core profit estimates for the FY2023 to FY2025.
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To Tan, Netlink’s dividend yield, at 6.4% of his FY2023 estimates remains “enticing”.
“With Maybank Investment Banking Group forecasting the Singapore 10-year bond yield to drop to 2.5% by the end of 2023, we expect Netlink’s DPU to rise by 1.8% p.a. over the next few years and yield spread tapering down to 300 basis points (bps) as Netlink focuses on long-term sustainability of its distribution,” he says.
“We continue to like Netlink Trust as a defensive shelter amid macro uncertainties, given its strong earnings visibility and stability,” he concludes.
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Overhang removed soon, says Citi
Citi Research analyst Luis Hilado is keeping his “buy” call on Netlink with an unchanged target price of 95 cents after the trust’s results stood in line with his estimates.
“The key question remains on the progress with discussions with regulator Infocomm Media Development Authority (IMDA) on the next five-year prevailing interconnect rates and whether the application remains to be a forward, rather than retroactive, application given that the new rates technically should have commenced in January,” writes Hilado.
“We believe investors, and increasingly consensus estimates, have been pricing in a rate reduction assumption already so all that remains is to set the bar. No cuts would be a positive surprise; in our view,” he adds.
Following an investor call hosted by Citi, Hilado notes that Netlink expressed optimism that the long-awaited decision over its RAB returns and pricing will be known within the current quarter.
“We currently assume an 8% reduction in residential and non-residential interconnect rates but believe consensus forecasts have a mixed outlook. As such, any cuts could trigger short-term negative share price volatility,” says Hilado.
“However, we view such as an opportunity to accumulate the shares that even on our more conservative assumptions are trading at a 6% sustainable yield against the long-term average of 5.6%. Meanwhile, if rate increases are granted this would likely be a universal positive surprise,” he adds.
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Yield not attractive enough, says PhillipCapital
PhillipCapital analyst Paul Chew is maintaining his “neutral” call on Netlink with the same target price of 85 cents.
This comes even though Netlink’s revenue stood within his expectations at 76% of his full-year forecast and ebitda exceeded expectations at 80% of his full-year forecast.
That said, Chew notes that the pressures from the higher interest rates remain.
“High-interest rates (and increased capital expenditures or capex for a new central office) will cap the growth in operating cash flows and the attractiveness of the current 6% dividend yield,” he writes.
To this end, the high-interest rate environment has diminished Netlink’s “bond-like” attractiveness of its stable dividends and utility cash-flows, he adds.
Awaiting pricing review outcome: OCBC Investment Research
OCBC Investment Research analyst Chu Peng is awaiting the outcome of the pricing review for the next review period from 2023 to 2027. The outcome is likely to be completed by March.
For the time being, Chu is keeping "buy" on Netlink with a lower fair value estimate of 98 cents, down from $1.07 previously after tweaking her estimates. The lower target price factors in a higher cost of equity assumption.
"The regulatory pricing review could remain as an overhang in the near-term. Nevertheless, we remain constructive on Netlink given its robust balance sheet, stable dividend and defensive business model which provides earnings resilience and visibility in the face of macro uncertainties," writes Chu.
Based on Chu's estimates, Netlink's earnings for the 9MFY2023 beat her expectations.
Units in Netlink NBN Trust closed at 87.5 cents on Feb 16.
