With strong earnings visibility and stability, NetLink NBN Trust is a defensive play amid the current backdrop of rising inflation and a potential economic slowdown, says Maybank Securities Research analyst Kelvin Tan.
That said, ongoing regulatory fibre pricing review remains a key overhang, adds Tan, and NetLink Trust is losing attractiveness as a dividend-yielding safe haven.
NetLink Trust designs, builds, owns and operates the passive fibre network infrastructure of Singapore. In an Oct 4 note, Tan is maintaining this “hold” call with a target price of $1.00, which represents a 10% upside.
“On the back of inflationary pressures and higher interest rates, Netlink Trust’s financial costs are well-hedged, with 76% of debt fixed at 1% until May 2026,” writes Tan.
However, modest growth in distribution per unit (DPU) reduces the attractiveness of NetLink Trust as an income-yielding investment. NetLink Trust’s dividend spread over bond yields and other interest-yielding assets has not widened since interest rates started to climb this year, Tan adds.
“On the regulatory review, we expect a mild decline in the fibre price for residential connections. This is in our opinion, unlikely to impact dividend payout as higher borrowings or lower capital expenditure can tide it through any near-term shortfall,” says Tan.
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Netlink Trust operates the sole passive backbone for Singapore’s nationwide fibre network with a mandated 100% of homes passed. As it has a virtual monopoly, ebitda margin is high at 70%, notes Tan. “More than 90% of revenue falls under a return on asset base (RAB) tariff regime based on a 7% pre-tax weighted average cost of capital (WACC). Tariffs are set over a five-year period with the current rate lasting until December.”
Residential connection revenue, which follows regulated rate structure, represents the bulk (about 62.5%) of the business.
ESG issues
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Tan has assigned NetLink Trust an ESG score of 55 “based on its aggregated quantitative, qualitative and target-based metrics”.
“NetLink Trust provides fibre network services. This exposes it to environmental risks. In particular, energy is consumed to provide power to co-location rooms but NetLink Trust has no direct control over energy consumed by its customers’ equipment,” writes Tan.
It is also exposed to data centres’ environmental risks, as many Singapore data centres, in the middle of their lifespan, were designed without sustainability and energy conservation in mind. That said, the trust has no direct control over its customers’ power consumption, adds Tan.
NetLink Trust generated and disposed of an average of 0.44% of fibre scraps (excess fibre too short to be reused) against fibre cables issued. This is below its 2.5% FY2021 target.
NetLink Trust recovered 391.4 tonnes of fibre cables from cable diversion. “These recovered fibre cables cannot be reused and will be disposed of at a National Environment Agency-approved facility for incineration.”
In FY2020, NetLink Trust invested $0.85 million to replace fan coil units in co-location rooms to improve the energy efficiency of the cooling system by 30%. “Going forward, more initiatives will be rolled out across its co-location rooms to reduce energy consumption.”
Meanwhile, the staff turnover rate of 17.7% is higher than the high-tech industry’s norm of 15.9%.
The total remuneration of NetLink Trust’s CEO and top five key management personnel amounts to $4.3 million, or 5.5% of FY2020 profit after tax and 15.5% of staff cost. NetLink Trust’s independent auditor has been Deloitte & Touche since its listing in 2017.
Units in NetLink Trust closed 1 cent higher, or 1.12% up, at 90.5 cents on Oct 4. This is down 9.5% year-to-date.
