SINGAPORE (Nov 10): DBS is maintaining its “buy” call on NetLink NBN Trust, Singapore’s sole nationwide provider of residential fibre network, with a target price of 95 cents.
In a Friday report, analyst Sachin Mittal argues that NetLink NBN Trust should trade at FY19 yield of 4.9% versus 5.6% now reflecting lower earnings volatility, longer asset life and ample debt-headroom for future growth.
This is because NetLink NBN Trust’s assets are mainly underground passive infrastructure like ducts, manholes and fibre with long asset life while business environment is also less volatile as 92% of the business is regulated in nature.
Projected FY19 total debt-to-EBITDA ratio of 3.2x is also much lower than 5.3x average for business trusts in Singapore/Hong Kong, implying room for higher growth by optimising its capital structure.
“We believe the market is concerned that rising interest rates may lead to a search for higher yields in the long term,” says Mittal, “NetLink NBN Trust has hedged its interest rates till March 2021 and growth in distributions should translate into higher distribution yields.”
One unique advantage of NetLink NBN Trust over REITs and business trusts is that any potential rise in the cost of capital would possibly lead to higher regulated returns from 2022 onwards, translating into higher distributions.
However, key risks for NetLink NBN Trust will be regulatory changes.
The counter is trading at 82 cents or 48 times FY18 earnings.
