SINGAPORE (May 8): DBS Group Research is downgrading its call on Netlink NBN Trust to “hold” from “buy” with an increased target price of $1.02 from 95 cents previously.
Currently, Netlink offers a decent yield of 5.2% (compared to 5.1% average yield offered by large-cap industrial S-REITs), which is relatively attractive given Netlink’s lower gearing and longer asset life. But upside potential is limited. Year-to-date, the stock has outperformed the Straits Times Index (STI) by 25%.
See also: Netlink NBN declares DPU of 2.53 cents for 2HFY20
In a Friday report, lead analyst Sachin Mittal says, “The Singapore Government’s 10-year bond yield has dropped to an all-time low of 0.9% recently, pushing investors to chase yield. However, we expect the Singapore Government’s 10-year bond yield to rise modestly over the next 12 months and project Netlink to trade around 5% yield by March 2021.”
Furthermore, the low-interest rate is like a “double-edged sword” for Netlink.
If interest rates continue to remain low over the next two to three years, the stock might benefit from the chase for yields in the near term.
However, low cost of debt may also lead to Netlink’s regulatory weighted average cost of capital (WACC) for the next review period (Jan 2023-Dec 2027) to be revised down. This might lead to a cut in future distributions, implying downside risk for the stock.
Nonetheless, the group’s business outlook seems promising as fibre broadband penetration is set to increase from about 95% currently. As of Dec 2019, Netlink’s network passed over 1.5 million residential homes, while there were 1.43 million residential end-user connections, representing 95% of homes passed.
Netlink should also benefit from StarHub’s accelerated fibre migration over 1H20 which will have a full-year impact over FY21.
“In the subsequent years, we expect Netlink to benefit from higher end-user fibre penetration currently, and growth in the number of new households,” says Mittal.
Netlink is also growing its market share in the non-residential fibre business. Growth in market share will be driven by an expanding SME market, which is mainly located outside of the Central Business District (CBD) and business parks where NLT faces lower competition from other fibre network providers due to its relatively extensive nationwide network coverage.
The group’s key strategies include deploying fibre within selected non-residential buildings, and extending network footprint into new major developments such as the Greater Southern Waterfront project.
In the long-term, growth opportunities could arise from the group’s Non-Building Access Points (NBAP) segment. This segment is involved in Singapore’s Smart Nation Programme, which requires the deployment of a network of sensors and monitoring equipment across Singapore to support applications such as autonomous vehicles, high-definition surveillance cameras, parking space management and weather data collection.
As at 1.30pm, units in Netlink NBN Trust are trading at 98 cents or 1.3 times FY20 book with a dividend yield of 5.0%.
