Analysts have turned slightly more restrained on Netlink NBN Trust following its recent earnings report, as they await results of a regulatory review that will decide its new pricing.
For its 1QFY2023 ended June, NLT reported earnings of $27.6 million, up 11.3% y-o-y. Revenue in the same period was up 4.8% y-o-y to $97.9 million, with growth coming from higher ancillary project revenue and connections revenue. The earnings, unsurprisingly, were in line with expectations, given the steady nature of its business model.
Kelvin Tan of Maybank Securities prefers to be more “prudently below consensus”, pending results of a review by industry regulator IMDA, which will determine the new pricing NLT can charge since 2017 when it was listed.
He believes that the pricing will “come under pressure” given lower interest rates relative to 2017, a bigger number of connections, and a higher risk-free-rate environment.
“We believe that share price will remain in suspended mode as the group waits for regulatory to complete the public consultation process,” writes Tan in his Aug 17 note, where he downgraded the stock from “buy” to “hold”, along with a target price of $1 from $1.05 earlier.
Nevertheless, Tan has kept his view that NLT remains a “safe haven” stock that offers “robust operating cash-flow, attractive yield, and resilient business model”.
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CGS-CIMB’s Ong Khang Chuen, on his part, has kept his “add” call but with a slightly reduced target price of $1.04, from $1.10 previously.
“We retain our view that NLT is a defensive play amid the current backdrop of rising inflation and a potential economic slowdown given its strong earnings visibility and stability,” states Ong in his Aug 16 report.
He reduced his target price to factor in higher a higher risk-free rate given the higher interest rate environment.
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OCBC Investment Research, meanwhile, has kept its "buy" call and fair value of $1.07. "We understand that negotiations for the Regulatory Price Review are still underway, and that a pricing reset could come in early 2023 or even extend into the middle of the year."
As for Sachin Mittal of DBS Group Research, he points out that NLT’s strong balance sheet will come in useful if any acquisitions are to be made. He expects distribution per unit for the whole of FY2023 ending March 2023 to reach 5.16 cents, implying a yield of 5.5%. Mittal has kept his “buy” call and $1.05 target price.
The research team at OCBC Investment Research has deemed NLT's results as "in-line" with expectations, as it keeps its "buy" call and fair value estimate of $1.07.
"In a rising rate environment, management believes that valuations may come down and they remain in a watch-and-see mode for now," the team writes. "We maintain our view that the key overhang for the name remains the ongoing regulatory review, but we remain constructive on NetLink’s robust balance sheet and resilient business model, especially in the face of macro uncertainties."
PhillipCapital analyst Paul Chew has also kept his FY2023 forecasts unchanged as NLT's revenue and Ebitda stood within expectations. On the regulatory review, Chew expects NLT to post a "mild decline" in the fibre price for residential connections, although it is unlikely to affect NLT's dividend payout.
"Higher borrowings or lower capital expenditure can tide through any near-term shortfall, in our opinion," he writes. However, NLT's "modest" distribution per unit (DPU) growth reduces its attractiveness as an income-yielding investment.
"NetLink’s dividend spread over bond yields and other interest-yielding assets have not widened since interest rates started to climb this year," he adds. Chew has kept his "neutral" recommendation with an unchanged target price of 96 cents.
NLT units traded at 94 cents as at 3.37pm, down 0.53%.
