Netlink NBN Trust’s (Netlink) CJLU performance for FY2023 ended March 31 exceeded analysts expectations, and they continue to favour the “high-yielding, safe haven stock”.
On May 18, Netlink reported 6.8% higher revenue y-o-y and 19.7% higher net profit, forming 101% of UOB Kay Hian Research’s (UOBKH) full-year forecasts and in line with consensus expectations.
NetLink builds, owns and operates the passive fibre network infrastructure of Singapore’s “Next Generation Nationwide Broadband Network” (Next Gen NBN).
UOBKH analysts Chong Lee Len and Llelleythan Tan say the steady top-line growth in FY2023 was driven by higher broad-based revenue growth across most segments, offset by lower Central Office and manholes services revenue.
In line with revenue, FY2023 ebitda and net profit surged as well. Excluding a $12.4 million one-off loss recorded in FY2022, FY2023 ebitda and net profit would have still grown by around 5.6% y-o-y and 5.4% y-o-y respectively.
Netlink declared a 2HFY2023 final dividend of 2.62 cents per unit, up from 2.57 cents this time last year, taking total FY2023 dividends to 5.24 cents, up from 5.13 cents for the prior financial year.
See also: Netlink NBN Trust reports FY2023 DPU of 5.24 cents, 2.1% higher y-o-y
The implied FY2023 dividend yield of around 5.8% is in line with UOBKH’s expectations.
As such, Chong and Tan maintain “buy” on Netlink in a May 22 note, with a higher target price of $1.05 from $1.02 previously. The new target price represents a 16.9% upside from the last traded price of 90 cents.
“With elevated interest rates, Netlink’s FY2023 net finance charges surged 49.4% y-o-y as the group’s effective average interest rates increased to 2.1% from 1.1% in FY2022. About 69.4% of Netlink’s $735 million borrowings are now hedged at fixed rates while FY2023 net debt/ebitda improved to 1.86x from 1.95x at end-3QFY2023,” note Chong and Tan.
See also: About 1,100 end-user connections may be affected by fibre service disruption in Bukit Batok: Netlink
Netlink has sufficient debt headroom (20.3% net gearing) to drive its acquisition ambition without compromising on cash flow and dividends, add the UOBKH analysts. “There is, however, no fixed timeline in terms of M&A activities and Netlink’s management may even consider a joint venture or consortium outfit in its acquisition strategy. Netlink sees growth opportunities arising from the digital economy, 5G rollout, connectivity into data centres and Singapore’s Smart Nation initiatives.”
OCBC Investment Research has the second-highest fair value on Netlink, at 98 cents. DBS Group Research, too, shares the "buy" call as well as OCBC's target price.
DBS analyst Sachin Mittal believes high inflation should not eat into Netlink's distributions. "We expect Netlink to have a higher regulatory weighted average cost of capital (WACC) over January 2023 to December 2027, as the current risk-free rate of 2.8% is much higher than the 2.1% seen at the time of its IPO in 2017."
Netlink's yield spread of 325 basis points (bps) is attractive compared to its last 12-month average of 290 bps, adds Mittal in a May 23 note. "The Singapore Government’s 10-year bond yield of 2.8% implies a yield spread of 325bps (slightly below its average spread of 350 bps), but higher than the last 12-month average of 290bps. We expect Netlink’s distribution per unit (DPU) to rise by 2% annually over the next few years, and the yield spread to narrow towards 250bps, to reflect the resilient nature of its distributions."
Pricing review
Meanwhile, Maybank Research analyst Kelvin Tan points to recent stock price weakness as the market awaits the Infocomm Media Development Authority’s (IMDA) pricing review.
“The ongoing review of the terms and conditions, including prices, of NetLink’s services offered under its interconnection offer by the IMDA is expected to be completed this calendar year,” says Netlink.
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Tan continues to see NetLink as a “defensive shelter amid macro uncertainty”, given its strong earnings visibility and stability. In a May 20 note, Tan maintains “buy” with a higher target price of 97 cents from 95 cents previously.
“Netlink has committed to complete the construction of its new Seletar Central Office (CO) to serve build-to-order (BTO) flats in the north of Singapore. It will also continue to work with telco players to acquire new non-residential and non-building address points (NBAP) customers to support digitalisation projects and its 5G rollout plan,” adds Tan.
CGS-CIMB Research analyst Ong Khang Chuen says Netlink and IMDA remain in active discussion to determine a suitable WACC for the regulatory asset base (RAB) pricing model, as well as potential impact of inflationary pressure on Netlink’s future cost base.
Inflationary pressures on capex and opex are taken into consideration under the RAB model. “We conservatively price in a 3% reduction in ICO pricing for the next review period in our forecasts, given a higher denominator (higher number of active fibre connections), but believe that Netlink’s strong operating cash flow generation can continue to support stable DPU growth of 2% p.a. without meaningfully impacting its debt profile,” writes Ong.
In a May 19 note, Ong maintains “add” with a higher target price of 95 cents from 92 cents previously. “Potential re-rating catalysts include earnings-accretive acquisitions and stronger-than expected growth in NBAP connections as Netlink benefits from telcos’ 5G rollout,” says Ong. “Downside risks include lower-than-expected ICO pricing in the upcoming review.”
PhillipCapital, Lim & Tan demur
On the other hand, PhillipCapital Research head Paul Chew thinks inflation and higher rates could eat away at future operations. Hence, Chew maintains “neutral” on Netlink but with a higher target price of 87 cents from 85 cents previously.
“As the country heads towards 10GBps broadband, more equipment will be required in the COs. To cater for the extra equipment, NetLink will need to expand power, cooling and space in the COs,” says Chew in a May 22 note. “The push toward Wifi 6e and 7, will be additional catalysts to drive up broadband demand.”
The new fibre rates NetLink can charge its customers is expected to be announced soon. Chew says his house’s base case is that fibre rates will be nudged marginally lower. “The regulatory review should be concluding soon. A recent jump in inflation and interest rates does affect expectations of future operating expenses and WACC. We expect only a modest reduction in fibre rates due to an expanded base of connections.”
Lim & Tan Securities' analysts, too, maintain “hold” on Netlink, but with a 97 cents target price. In a May 22 note, the analysts compare the stock’s lower yield spread to the higher Singapore treasury yield rates of about 2.9% due to a hawkish rate environment.
Units in Netlink NBN Trust closed flat at 90 cents on May 22.
