Maybank Kim Eng analyst Kareen Chan has maintained her “buy” recommendation and target price of $1.11 on Netlink NBN Trust as its distribution per unit (DPU) of 5.2% for FY2021e offers “clearer dividend visibility” than other yield plays.
This, Chan says, is due to 94% of Netlink’s 2QFY2021 revenue being secured by recurring cashflows, while 87% is under fixed regulatory pricing till the next review in end 2022.
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“Its natural monopoly in the residential fibre connections segment will be driven by annual new household formation (10-year compound annual growth rate or CAGR of 1.7%) and higher broadband penetration rate of 94%,” says Chan. “Meanwhile, we expect the non-fibre segment to remain stable due to long-term contracts.”
Chan also expects Netlink’s diversion and installation divisions to normalise as its manpower capacity has normalised to pre-Covid-19 levels in 2QFY2021.
“That said, both divisions are unlikely to catch up on projects that was previously delayed. While the non-residential market appears well-served and competitive, we still expect growth of 1.7% CAGR through FY2021-2023E as NetLink starts new projects in schools and continues to improve presences in data centres,” she says.
See:Netlink NBN Trust declares 0.4% higher 1H DPU of 2.53 cents
Meanwhile, growth of Netlink’s residential division was capped by muted new connections due to Covid-19, but the segment should pick up once construction activity resumes, she notes.
To this end, Chan believes that Netlink’s DPU will be sustained despite headwinds.
“NetLink’s distributions have been stable and/or growing based on its historical track record. We forecast a higher cash distribution in FY2021e due to better-than-expected operating cash flow amid expanded EBITDA margins,” she says.
“NetLink is a domestic-yield play while waiting for Covid-19 re-opening to play out. Changes to its regulated returns (7% pre-tax weighted average cost of capital or WACC) is the key risk to our view, but we do not expect this till end 2022 (March FY2023),” she adds.
Units in NetLink closed flat at 96.5 cents on Dec 1.
