Citibank analyst Luis Hilado has downgraded his rating for Netlink NBN Trust to a “sell” from a “buy” rating, as well as sharply dropping his target price from $1.08 to 90 cents.
In a Jan 7 report, Hilado says that Netlink’s review of its regulated asset base (RAB) rates could come “sooner than expected” from the Infocomm Development Authority, and this will cause a “period of uncertainty”, in his view.
The RAB pricing model 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.
Hilado thinks that the company could see a 8% reduction in rates for residential connections and non-residential connections, down from his former prediction of 15%-20%.
While the rates are expected to see a smaller reduction, he brings forward his prediction of the cuts to 4QFY2023, which ends in March 2024, instead of 1QFY2024, which ends in June 2024. “We have assumed similar cuts will recur at such level in every future review period.”
Aside from the rate revision decision this year, Hilado says there is also the impact of the rising interest rate environment as a potential share price action risk.
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He has assumed a 75 basis points interest cost increase for floating rate debts, but adds that the attractiveness of yield plays such as Netlink will be relatively weaker as global and local interest rates rise.
Furthermore, with the stock outperforming the market during the Covid impacted period on a 6-month and 24-month basis, he thinks there will be room for profit-taking once risks begin becoming more evident and as reopening lessens the attractiveness of home broadband services.
Hilado acknowledge, however, that there is potential for additional dividends if more capex is financed with leverage. This is with Netlink at 2 times net debt to EBITDA and being “comfortable” to raise this to 4 times.
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“We believe, however, that instead management will conservatively keep a buffer for uncertainty, protecting yield rather than providing upside,” he says.
At 3.01 pm, Netlink shares traded at 99 cents, with a FY2022 price to book ratio of 1.5 times and dividend yield of 5.2%.
