Analysts praise Netlink NBN Trust’s CJLU “stable performance” in 1QFY2024 ended June, with net profit up 2.1% y-o-y to $28.2 million, driven by higher revenue contributions across most business segments.
Among four research houses cited here, UOB Kay Hian Research analysts Chong Lee Len and Llelleythan Tan have the highest target price on Netlink, which they call a “high-yielding, safe haven stock” with 6.2% dividend yield.
In an Aug 21 note, Chong and Tan maintain “buy” with an unchanged forecast of $1.05.
Netlink builds, owns and operates the passive fibre network infrastructure of Singapore’s Next Gen NBN. Management sees growth opportunities arising from the digital economy, 5G rollout, connectivity into data centres and Singapore’s Smart Nation initiatives.
“Importantly, Netlink has sufficient debt headroom, at 23.6% net gearing, to drive its acquisition ambition without compromising on cash flow and dividends,” note the UOBKH analysts. “There is, however, no fixed timeline in terms of M&A activities and Netlink’s management may even consider a JV or consortium outfit in its acquisition strategy.”
Results for the upcoming Infocomm Media Development Authority (IMDA) regulatory review were not announced in the latest 1QFY2024 business update, but Netlink expects the review of its interconnection offer (ICO) prices, terms and conditions to be concluded latest by end-2023, or 3QFY2024.
In addition, adjustment to rates should be implemented within a few months’ lag once the final decision is announced, says management.
UOBKH thinks 3Q2023, or 2QFY2024, is a more likely timeline. “Management noted that discussions were still ongoing and that the delay was not disadvantageous to the group.”
Netlink has been investing in its network assets to cater to the growing end-user demand for residential, non-residential, non-building address points (NBAP) and segment connections. These investments would in turn increase its regulatory asset base.
See also: Netlink Trust: Internally managed trust that hasn’t raised equity yet
UOBKH expects the next return on the regulatory asset base to be slightly higher, in view of the unprecedented elevated interest rates environment and expected higher cost base from inflationary pressures.
Distributions might rise 2%-3%
Netlink, which is 24.8% owned by Singapore Telecommunications (SingTel) Z74 , pays distributions semi-annually. For FY2023, Netlink paid distribution per unit (DPU) of 5.24 cents, marking another increase since its IPO in 2017. In FY2018, FY2019, FY2020, FY2021 and FY2022; DPU was 3.24 cents, 4.88 cents, 5.05 cents, 5.08 cents and 5.13 cents respectively.
DBS Group Research thinks this could rise further in FY2024, staying “buy” with an unchanged target price of 98 cents.
Netlink is trading at a 12-month forward distribution yield of 6.0%, implying a yield spread of around 300 basis point (bps), says DBS in an Aug 18 note. “The Singapore Government’s 10-year bond yield is at 3.2%, implying a yield spread of around 300 bps but similar to the last 12-month average. We think that Netlink may raise distributions by only 2%-3% in FY2024, despite a rise in regulatory weighted average cost of capital (WACC).”
DBS estimates that every 10 bps change in regulatory WACC will have a +1% impact on its ebitda. “We expect a 30-50 bps hike in regulatory WACC, but, in our view, Netlink may focus on long-term sustainability of its distributions. We expect Netlink’s DPU to rise by 2% annually over the next few years, and the yield-spread to narrow towards 250 bps, reflecting Netlink’s resilient nature of distributions.”
Similarly, Maybank Securities forecasts that the Singapore 10-year bond yield will drop to 2.75% by end-2023. Its analyst Kelvin Tan thinks this might increase the yield spread further, leading to a rally in Netlink’s share price. “We expect DPU to rise steadily by 2%-3% in FY2024 and yield spread to taper to 250 bps as Netlink focuses on long-term sustainability of its distribution.”
See also: Analysts raise TP on this 'high-yielding, safe haven stock' after FY2023 earnings beat
Maybank’s Tan keeps his “buy” call in an Aug 18 note with an unchanged target price of 97 cents.
Meanwhile, CGS-CIMB Research analyst Ong Khang Chuen continues to like Netlink as a defensive play “amid the macro uncertainties, given its strong DPU visibility and stability”.
Ong reiterates his “add” call on Netlink with an unchanged target price of 95 cents. “Potential re-rating catalysts include earnings-accretive acquisitions and stronger NBAP connections growth as Netlink benefits from telcos’ 5G rollout. Downside risks include lower-than-expected ICO pricing in the upcoming review.”
Paul Chew, head of PhillipCapital Research, prefers to wait for the outcome of the tariff review, staying “neutral” on Netlink with an unchanged target price of 87 cents in an Aug 22 note.
Chew also points to slower-than-expected growth in residential connections. “Residential connections increased by 4,023 in 1QFY2024, the slowest in four quarters. The weakness is caused by delays or time taken to renovate and move into the vacant units.”
The continued rise in interest expenses is also cause for concern to Chew. “Although the borrowings at a fixed rate is stable at 69.4%, the effective average interest rate in 1Q24 rose by 0.8% points YoY to 2.6%, driving interest expense up.”
As at 10.40am, units in Netlink are trading 0.5 cents lower, or 0.59% down, at 85 cents.
