Maybank Kim Eng has reinitiated coverage of NetLink NBN Trust with a “buy” call and a target price of $1.08.
Analyst Kareen Chan says this is because NetLink’s business is less volatile than other yield plays such as certain REITs and telcos, amid risks of distribution per unit (DPU) cuts and competition. In addition, NetLink, being the sole nationwide provider of passive fibre network infrastructure in Singapore, is a domestic-yield play amid Covid-19 re-opening uncertainties.
In addition, NetLink has strong recurring cashflow from non-fibre and residential connections, with the residential segment representing some 62.5% of FY20 revenue. Chan expects this segment to provide earnings stability for NetLink, driven by high residential broadband penetration rate of 94% and annual new household formation of 25,000 units or a 10-year CAGR of 1.7% through 2029. Meanwhile, non-fibre segments (18.5% of FY20 revenue) are expected to remain stable due to long-term contracts.
Some opportunities that the analyst has identified for NetLink is the future rollout of the 5G network in Singapore. Chan believes NetLink will continue to have a role in 5G deployment as Singapore will have two nationwide 5G network coverage by 2025 and the incumbent 5G network vendors currently only have their own coverage concentrated in the CBD and business park areas.
Successful 5G rollout requires base stations to be linked with existing fibre infrastructure, and she expects incumbents will use NetLink’s fibre infrastructure instead of building their own to reduce capex. This presents an opportunity to grow NetLink’s non- building address points (NBAP) segment. Meanwhile, the non-residential segment will be driven by office decentralisation and data centre growth.
NetLink's FY21 DPU yield of 5.2% is comparable to Singapore REITs’ FY20E (end-Dec) average yield of 5.6% and telco players’ 5.5%. The analyst said she favours NetLink over telcos and certain REITs, which exhibit higher risk of DPU downside from capital preservation amid the Covid-19 outbreak, weak fundamentals and telcos’ declining average revenue per user (ARPU) and equipment sales due to supply disruption.
As at 12pm, NetLink NBN Trust was trading flat at 96 cents, with a dividend yield of 5.2%.
