DBS Group Research analyst Sachin Mittal has upgraded Netlink NBN Trust to “buy” from “hold” previously.
His target price estimate has also been increased to 98 cents from 90 cents before. “We model a 250-basis point (bps) yield spread, assuming a risk-free rate of 3.0%, to arrive at a target distribution yield of 5.5% on a 12-month forward distribution per unit (DPU) of 5.40 cents,” Mittal writes in his Jan 10 report.
To him, Netlink’s yield of 6.5% as at its last-traded target price of 83.5 cents on Jan 9 is attractive. The stock’s yield spread of 360 bps is also “attractive” compared to its last 12-month average of 290 bps.
In his report, the analyst notes that the Singapore government’s 10-year bond yield shrunk to 2.9%, down from 3.6% in November 2022, implying a yield-spread of 360 bps. This is similar to Netlink’s average spread since its listing.
On this, Mittal expects Netlink’s DPU to rise by 2% annually over the next year's yields. Its yield-spread is also expected to narrow towards 250 bps, reflecting the stock’s “resilient nature of distributions”.
Furthermore, the high inflationary environment should not eat into Netlink’s distributions. “Inflationary pressures on capital expenditures (capex) and operating expenditures (opex) are taken into consideration under the Regulated Asset Base (RAB) model,” says Mittal.
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“We expect Netlink’s higher regulatory weighted average cost of capital (WACC) over January 2023 [to] December 2027 due to a higher risk-free rate than 2.1% seen at the time of its initial public offering (IPO) in 2017,” he adds.
Despite a rise in regulatory WACC, Mittal expects Netlink to raise distributions by only 2% to 3% in the FY2024. This is based on a 10-bps change in WACC to have a +1% impact on Netlink’s ebitda, the analyst writes. To this end, he is expecting to see a 300 bps to 500 bps hike in the regulatory WACC.
“In our view, NLT may raise its distributions by only 2%-3% as it focuses on [the] long-term sustainability of its distributions,” Mittal stresses.
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Despite the upgrade, the analyst warns that Netlink’s bear case valuation may dip to 77 cents. This is based on any sharp rise in the risk-free rate from the analyst’s base-case of 3.0% to 3.5% and coupled with Netlink’s yield spread hovering around 350 bps (versus its base case of 250 bps).
As at 3.04pm, shares in Netlink are trading flat at 83.5 cents.
