SINGAPORE (May 15): OCBC Investment Research, DBS Vickers Securities and Maybank Kim Eng are maintaining their “buy” calls on NetLink NBN Trust (NLT) with the respective price targets of 95 cents, 90 cents and 83 cents.
Likewise, Phillip Capital continues to rate the trust at “accumulate” at a 93-cent price target.
This comes post the release of NLT’s latest set of 4Q financials, which brought total DPU to FY19 to 4.88 cents, exceeding IPO projections across a number of metrics translating to a yield of 6%.
In a Wednesday report, OCBC analyst Joseph Ng says he continues to like NetLink NBN for its robust FY19 DPU and healthy balance sheet that provides ample debt headroom, which he believes the manager will utilise to lever up in the near-term, so as to prevent volatility in distributions.
Further, he believes the trust’s robust capex plan in building up its regulated asset base (RAB), which should put it in good stead for the next price review period starting from 2023.
The analyst has reduced his risk-free assumption to 2.3% from 2.8% previously as OCBC rolls forward valuations to result in a higher fair value estimate on NetLink NBN.
“Much has been made of SP Telecom’s announcement to build an alternative data fibre network in Singapore. We concur with management that the short-term impact to NLT NBN is likely to be muted, given that SP Telecom’s focus is likely to be in the non-residential space, which only forms 8.5% of the group’s FY19 revenue,” notes Ng.
DBS analyst Sachin Mittal highlights the trust for its attractive 6% FY20F yield versus the 5.7% average offered by large-cap industrial S-REITs.
In Mittal’s view, NLT should trade at a lower yield than S-REITs given the dependency of its distributions on the economic cycle; lower debt headroom to fund future growth; and much-longer asset life as the trust incurs annual capex to replenish its RAB.
“Higher-than-expected FY20F capex funded via capex reserve and debt is a positive step to boost the regulated asset base which will be factored in the next review period from 2022 onwards,” says the analyst.
“NLT's one unique advantage over REITs and business trusts is that any rise in the cost of capital might lead to higher regulated returns from 2022 onwards, translating into higher distributions. NLT has also hedged its interest rates till March 2021,” he adds.
Meanwhile, Maybank analyst Luis Hilado continues to believe NLT provides a haven amid current industry turbulence and economic uncertainties, given the trust’s naturally-defensive residential fibre monopoly business and sustainable 6% yields.
In line with management guidance for higher revenue and capex in FY20, Hilado has assumed an additional $20 million capex to take FY20E spending to $80 million, which he anticipates to be funded by debt considering the trust’s sub-20% gearing level.
“Weighing just 0.4% on FY21E profits, we see its additional depreciation charges as part of management’s preparations for the next round of rate review in FY23E for an expanded rate base from which returns are guaranteed,” says the analyst.
Phillip Capital analyst Alvin Chia, too, is expecting capex to rise in FY20E on the back of strong demand in the residential segment, with the non-residential segment enjoying stable growth and while non-building address point (NBAP) connections gain traction in FY20E.
“We are optimistic on 5G and the growth potential it may bring to NLT,” says Chia.
“We expect higher residential connections as NLT progressively rolls out its fibre network into these new estates and to unconnected landed properties. We have modelled in a 2.4% growth in residential connections for FY20E,” says Chia.
As at 11:32am, units in NLT are trading 0.6% higher at 84 cents or 16.9 times FY20F PER, based on OCBC estimates.
