CGS-CIMB Research has initiated an “add” call on Netlink NBN Trust (NLT) with a target price of $1.10, calling it a “defensive yield play amid market volatility.”
Analyst Ong Khang Chuen said this is given its “high barriers to entry, strong earnings visibility and stability” due to the trust’s passive fibre network, which makes up the foundation of Singapore’s Next Generation Nationwide Broadband Network (NBN). The NBN enables ultra-high-speed internet access to be delivered throughout the nation.
Ong notes that NLT is the sole network provider of residential fibre broadband in Singapore, with over 1.43 million residential connections and a 94% penetration rate) as at end June.
Given its extensive network reach, he believes NLT is well-positioned to support non-building access point (NBAP) demand arising from Singapore’s Smart Nation Programme and the rollout of 5G network infrastructure locally.
Furthermore, NLT also has about 35% share of the nation's non- residential broadband market as at end-FY19, which it intends to grow through expanding its customer base in data centres and small-medium enterprises (SMEs).
Notably, as the sole network provider of residential fibre broadband in Singapore, he believes NLT’s business is resilient to economic and business cycles given the utility-like nature of broadband.
He pointed out about 80% of NLT’s topline in FY20 was derived from stable, recurring revenue streams regulated under the Regulated Asset Base (RAB) model.
In addition, regulated revenue is allowed to expand in tandem with additional capital expenditure (capex) spend, and NLT’s interconnection pricing is subject to review by Infocomm Media Development Authority (IMDA) every five years, with the next review in 2022.
With low net gearing of 17.1% and strong EBITDA interest cover of 12.7x as of end-Mar 2020, Ong believes NLT can gear up to invest for future growth while maintaining a 3-year DPU compound annual growth rate (CAGR) of 2.7% over FY20-23.
Finally, he also believes that NLT’s yields should trade in line with local telco’s 4.6% and large-cap industrial REITs’ 4.4%.
This is because unlike telcos, NLT does not have to engage in price competition or service differentiation to preserve market share, and have lower capex needs.
Ong also sees lower risk of dividend cuts for NLT vs. the REITs, which are expecting weaker occupancy rate and rental reversions due to the Covid-19 impact.
As at 11.34am, shares in NLT traded at 97 cents, with a forecasted dividend yield of 5.39%.
